Sale of rental property - Do we include depreciation on appliances as well as the building?

[craigm1]

Can you please help.  We sold our rental property and have been taking depreciation on the property as well as some of the appliances.  When we have to account for the total depreciation, do we include the depreciation for the appliances as well as the building, or can we just include the depreciation for the building?  Thanks!

[PatriciaV · Accepted solution]

Yes, when you sell a Rental Property and its assets, you must allocate the sales proceeds to all assets that were sold. This includes appliances and improvements that have been depreciated. You may use any reasonable method to allocate the sale. 

One option is to allocate the a portion of the sale equal to the remaining adjusted basis of depreciable assets first, then apply the remainder to the rental property itself. To do this, you would first need the adjusted basis for the depreciated assets as of the date of the sale. If you sell during the year, you must include depreciation expense for the partial year. This method results in no gain or loss for the sale of depreciated assets.

Your other option is to report a sales price of zero to the depreciated assets and enter the enter sales proceeds to the rental property. Since capital gains & losses are netted together on your tax return, this method should generate the same result as allocating the sale.

Note that in TurboTax, you must report the sale for each item under Assets/Depreciation. There is no option to include all assets in one sale transaction.

[Margie-TF]

I understand the overall concept here. But when it comes to the specific options, if you record a sales price of zero on the depreciated sub-assets (property improvements, appliances etc), then it seems like those items would register a loss, and there would be no depreciation recapture tax on the depreciation previously claimed for those assets. There would be a higher gain on the primary property asset, but the depreciation recapture would be limited to the amount of depreciation that had been taken on the primary asset, so the end result would be more of the gain taxed at the 15% capital gains rate and less of it taxed at the 25% depreciation recapture rate.

On the other hand, if you allocate a percentage of the sales price to each item, whether you do it by allocating an amount equal to your current adjusted basis or a percentage of the property according to your cost percentage (two other options I've seen presented), then you would have to pay 25% tax on the amount equal to any depreciation you had previously taken on those sub-assets, and then 15% on any remaining amount. So the overall effect would be a (perhaps slightly) higher tax bill. Is this right?

If so, then obviously I would prefer to claim it according to the option with the lower tax bill, but I'm guessing the IRS would frown on that choice. Am I thinking about this and understanding it the right way?

[davedaps]

This is very confusing. I've read multiple answers from experts and they've all said something completely different!

One says price it above the value to show a profit and get depreciation recapture

here it says price it at 0, so no recapture would take place presumably

and this article also says price it equal!

I wish we could get a straight answer for this.

[Carl]

When it domes to totals, *you* don't get to pick numbers out of thin air. (which it what it sounds like you've been told to do.)  Since this is rental property you sold, the below guidance should help. The absolute *MOST* important thing is that you can *NOT* allocate sales price across non-depreciable assets. More specifically, you can NOT allocate the cost basis or sales price of the land (which is not depreciated) across other assets that *are* depreciated, and vice-versa. So pay close attention to whats in bold text below. This really is simple *once* you understand it. It's the "understanding" part that can sometimes be a challenge.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically when working through an asset you select the option for "I stopped using this asset in 2017" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[Rev-Paul]

I sold my town-home rental property for $140,000 in 2019.  It was purchased in 2014 for $89,900.  At the time of the purchase, I allocated a certain price for the land (19,900).  Now, working through the Sales information for my 2019 taxes, I am asked for asset sales price and expenses and Land sales price and expenses.   How do I allocate the prices?

[RobertG]

You can use any reasonable method to allocate the prices.  It will not affect the amount of tax you pay on the sales transaction.  You claimed a land value of 22% of the purchase price in 2014; if there were no major changes to the property you could allocate the same 22% in 2019.

@Rev-Paul

[aguirrer57]

Sounds like best answer running and it's now 2020.

Follow on question... since the sale of the depreciable assets along with the rental property doesn't produce its own 1099-S, does this require reporting on Form 8949 and Schedule D for those "capital assets"?    Hope I'm mixing assets and oranges and the answer is no.  Thanks.

[JamesG1]

The sale items will be reflected on forms 4797 and Schedule D.

You also likely to see entries on Schedule D for both the land portion of the asset and the depreciated structure.

Follow the instructions in TurboTax and the entries will be reported correctly.

[Carl]

Here's the deal, and I figured this out about the TurboTax program several years ago.

If you sell the property at a gain, then you must show a gain on "ALL" assets sold - even if that gain is only $1 on some of the assets.

If you sold the property at a loss, then you must show a loss on "ALL" assets sold - even if that loss is only $1 on some assets.

Most of the time (not in every situation) if you show a loss on some assets and a gain on others, the program just flat out *can* *not* deal with it correctly. Especially in the "depreciation recapture" arena. Worst part is, if it screws it up, you'll never know it until you get the nasty gram from the IRS a few months after your e-filed return is accepted by the IRS.

So I highly suggest you report your sale using the below guidance so as to avoid any possibility of any refund you may be expecting from being delayed, and you getting a nasty gram from the IRS fist, instead.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[Evan16]

Ripping my hair out here. If I sold a rental property we have owned for 8 years and have reported as such, why do I have to add it as an asset and then show it as sold. Did I miss something? Also there were assets (ie., appliance) and improvements (kitchen remodel), all of these assets were sold as part of the property. Do I just indicate "sold" at 0 value and 0 expense? How can you show a loss or a gain on something that was part of the rental property sold?

Thanks

E

[KrisD15]

Let's say you added a refrigerator at a value of 2,500 three years ago. 

(basis 2,500, deprecation taken 1,500) 

You sold the rental for 200,000 and the land was valued at 20,000

That leaves you with 180,000 to allocate. 

You can allocate 1,000 towards the refrigerator to zero it out, or 1,001 to show a profit as Carl suggests. 

If there are no other assets, that would leave 179,000 to go towards the building (or 178,999 if using Carl's advice) 

WHY? 

Lets say you bought the rental for 150,000 eight years ago and started depreciating it over 27.5 years. 

Then five years later you add a refrigerator costing 2,500. 

You can't add 2,500 to the building because the building has depreciated 5 of it's 27.5 years, while the refrigerator will depreciate over the next 5 years. 

Then, 3 years later you sell everything. Well, now you need to take the proceeds from the sale and allocate that between the assets and land. 

Finally, the depreciation you've been deducting year after year is recaptured. 

The depreciation is taxed as income. 

The gain is taxed as capital gains. 

The main reason you need to split the sale between the assets is that the assets needed to be listed separately in order to be depreciated over their individual life-span and from the date they were placed into service. And land is never depreciated, so that had to be listed separately from the other assets.  

[Evan16]

This was extremely helpful. Thanks.

[Lnel37]

I sold a Condo rental. I tried allocating per your suggestion with a $1 gain on the Improvements (dishwasher, dryer, etc.) When I do so, I get 2 separate gains. The gains on the Improvements are treated separately. Why can I not allocate the Sales Price to the Improvements so that I have $0 gain or loss? When I tried that, it worked. The correct depreciation recapture gain was recorded for the condo and all the assets were "taken off the books."

[genrlconfusion]

I found this very helpful, but my case has an added complexity that I don't know how to treat. I have the very situation described here, but then early in 2020 I had to do extensive work on the rental house >$100k to get it ready to sell, which it did mid way through 2020. How do I treat that large CAPEX in 2020 when the house sold in 2020?