How do I dispose of a rental property asset? Just delete?

[Carl]

Upon selling the vacation rental, I have to sell the 10 year old roof, for more than I paid 10 years ago?

"You" said you sold at a gain. So yes.

And I have to sell the TV, Fridge, Stove, Hot water heater (and landscaping items) for more than I paid 10 years ago?

Yep.

My first question, who would believe anyone could sell a 10 year old worn out item, for even 1 dollar more than it was at new, 10 years ago?

Bottom line. If you show a gain on some assets, and a loss on other assets, then your depreciation recapture will be wrong.  The TTX program will not catch it as an error, because mathematically there is no error. But the IRS will catch the fact that all prior depreciation was not recaptured.  Usually 3-5 years down the road. Sometimes even longer. When they do catch it, the back taxes, fines and penalties will not be cheap.  It's your call.

[LB641]

I understand what you are saying, and I appreciate your time, and effort to help me understand the concept. It's the logic that apparently is getting in my way, and this is a first time, and not something I have done before.  I am saying to myself, these assets in some cases are 10 - 12 years old.  Trying to wrap my head around how the IR S, or anyone else, including the buyer, would believe that I could sell these items/assets, at full price (original cost) back 10+ years ago. Then add a $1.  Are they really worth the original cost after 10+ years of use? And who would pay that original cost? Perhaps this is more of a how the program works, vs the logic of what an item is worth after 10+ years. Thanks - Just want to enter the data correctly, and stay off the IR S-radar.  Sounds like disposed of, in some cases, is an easier way, and the program still handles it.  Much Thanks -   By the way, meant to ask, do I need to do this for all of the assets that are no longer being depreciated, as they have been fully depreciated. or just the ones still being depreciated?  Thanks

[Carl]

It's the logic that apparently is getting in my way,

When it comes to taxes you're dealing with a government entity here. Since when has the IRS ever used logic? 🙂

[pdedes]

LB641,

I feel your pain and frustration. I have been a TTX user for nearly 20 years, and it has faithfully been tracking my rental properties and other financials. In 2021, I sold 5 of my properties and am facing the issue you and others have described over the past couple days (I being one of them). The key thing I have taken away from Carl's responses is that it is the TTX program, not the IRS, that does not properly handle the depreciation recapture of the assets associated with a property. We have to play with the sale price of each asset to convince TTX to report properly. And yes, doesn't seen right to sell a 10-year-old roof for more than you paid for it, just to get TTX to work right. If TTX could at least provide a suggested breakdown of sale price in these situations, they could protect their customers for what Carl warns about 3-5 years down the road. I wonder if you opt to have TTX review your return for a fee, if they would catch/correct the problem. I also wonder how an accountant would report this. I doubt they have to trick the system this way.

[Carl]

I also wonder how an accountant would report this. I doubt they have to trick the system this way.

An accountant would simply show the rental property and all assets as "removed for personal use" on the closing date of the sale. (Perfectly doable in TTX) and then figure the total amount of depreciation taken on all assets, since depreciation stops on that date.

Then they would enter the sale as a single transaction so that total gain would be shown, and total depreciation taken would be recaptured. This is also perfectly doable in TTX after you show the property and all assets converted to personal use on the closing date of the sale. You add up the total amount of depreciation taken on all assets up to the closing date/conversion date. Then you have that "magic number" you need (total depreciation taken on all assets.) Then you report the sale in the "Sale of Business Property" section where you only need to enter the total cost basis of all assets combined, total depreciation taken on all assets combined, and total sales price of all assets combined.

[Anonymous_]

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@Carl wrote:

I also wonder how an accountant would report this. I doubt they have to trick the system this way.

An accountant would simply show the rental property and all assets as "removed for personal use" on the closing date of the sale.

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It is fairly simple; a tax preparer using professional tax software does not have to trick the system.

Actually, if the taxpayer were a client for more than a year or two, the accountant would typically have basis information and depreciation schedules for the property.

The total sales price would be reported as well as the adjusted basis and accumulated depreciation (as one total for all assets). Essentially, most would use the same method you described in your response. 

[LB641]

Thank you. I was beginning to wonder if it was just me, and I was missing something. I have been using TTX for many years, and using it since 2009 for the rentals. I am kind of stuck with the program now, and would like to close out the rental sale(s) with the TTX history over the years.  Part of the problem, is the folks giving advise, and getting frustrated with us, are all experts and frequent users. This is what they do. For the rest of us, it's not what we do everyday. So pardon us if it does not make sense right away, and it takes some questions and answers to fully understand and grasp what is being said. We don't think and reason like professional users, or accountants. So our logit and reasoning takes some time. It would help if maybe a TTX employee or representative would chime in, and provide a step by step bullet point guide as to how we need to do this, as the TTX program has to be manipulated, in order to get the proper results. Years ago they simply said add $1.00 as the sale price. Now it seems they are saying you have to add$1 to the original cost of the asset item, and then enter that number as a sold price (ie: $7,000 AC unit, plus $1) entering $7,001.00 as the sold price. Yes that seems counter logic, as no one, would buy the old AC unit for fulll price. Same as the roof. Who sells a roof??? And if the 10 year old roof originally cost $5000, who would think we need to add a $1 to it, and enter a sales price of $5,001? That seems to should us in the foot. But I believe it is what they are saying needs to be done, in order to work around TTX program issues. If they exist for the 2021 tax year. This is why a simple (layman's) step by step would help. Same for the converted to Personal Use option, as prior to sale/closing, some items are disposed of.

[Anonymous_]

@LB641 

You might want to look into TurboTax Live or Full Service just for the 2021 tax year.

See https://turbotax.intuit.com/lp/ppc/1271?srqs=null&cid=ppc_gg_b_stan_all_na_turbotax-live_ty21-bu2-sb...

[Anonymous_]

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@LB641 wrote:

This is why a simple (layman's) step by step would help. 

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The step-by-step would primarily consist of you making the initial calculations manually.

You know your selling price less selling expenses, so that is the first step.

Second, you would add the cost of all of the improvements made to your initial cost basis of the real estate to arrive at the total basis you will report in the program.

Finally, you would add all of the depreciation deductions you had taken over the years (for all assets) to arrive at your total accumulated depreciation figure (and would enter that figure in the program).

You could then convert the improvements made to personal use in the program and report one total sales price (less selling expenses) with one basis and one figure for accumulated depreciation.

[LB641]

Thank you, but again, accountant talk. This area that others I I are talking about (the sale of a rental property after years of reporting with TTX). We need to get through this, and we will be done.

The cost basis of the home (minus the "land") is already entered as an asset.  We report the sale and the sale price in the program after indicating that the property was sold in 2021.  That sale amount would be reduced by the sum total of various assets that we do not dispose of (another how to question we have asked for guidance on). As to the remaining assets like the roof and AC units. They already have a cost basis entered. You are saying that TTX requires us to add at least $1 to that original price already in as the asset, and use that number as the "sale price", not just 1$, but the total of $1 and the original purchase price of the asset? And then that number would be subtracted from the house sale sum total (what the house was sold for). And somehow figure out the land vs structure value. This is where TTX isn't making this easy for us non-tax accountants.  This is where some step by step would help, which gets us all back to our original questions. Simply, how do we report the sale of a rental, and get through it correctly? Be nice if a TTX employee would weigh, or we could get some step by step guidance. We can do it, just guide us and point us in the right direction. We don't want to shoot ourselves in the foot, but we also don't need to stir us the IR s.

[Carl]

Understand that your gain/profit on the sale is taxed at the Capital Gains tax rate, while the recaptured depreciation is taxed as ordinary income. For simplicity, I’m not going to break out the separation of the gain and recaptured depreciation, and I’m not including sales expenses either.

House purchased for $100,000 and placed in service on Jan 1, 2010. Allocated $20K to the land and $80K to the structure. The land is not depreciated. Only the $80K on the structure gets depreciated over 27.5 years.  Entered into TurboTax and classified as Residential Rental Real Estate.  Entered as:

Date in Service: 1/1/2010
COST: $100,000
COST OF LAND: $20,000

The program (not you) does the math and depreciates the structure value of $80K over the next 27.5 years.

Had the roof re-shingled and was placed in service on Jan 1, 2013. At a cost of $10,000. Entered into Turbotax as:

Date in Service: 1/1/2013
COST: $10,000
COST OF LAND: $0

To figure the depreciation I use the worksheet the starts on page 38 and continues to page 39 of IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf. Table A-6 on page 73 applies here.

First year (2010) depreciation is $2788.00
2^nd year (2011) depreciation is $2909.00
3^rd year (2012) depreciation is $2909.00

For the 4^th year, the new roof has added $10K to the cost basis of the depreciated assets. So the program “has” to figure depreciation on the roof separately since it was  “NOT” placed in service at the same time the structure was.

4^th year (2013) depreciation on the structure is $2909.00
1^st year (2013) depreciation on the roof is $349
Total depreciation for 2013 is $3258

5^th year (2014) depreciation on the structure is $2909.00
2^nd year (2014) depreciation on the roof is $364
Total depreciation for 2014 is $3273

Depreciation each year on each asset will remain unchanged through 2021. Now let’s say we sold this property on Dec 31, 2021 for $200,000

Total depreciation on structure taken is $34,787
Total depreciation on roof taken is $3261
Total depreciation taken on all assets is $38,048

Let’s enter this in TurboTax the wrong way first.The “Adjusted Basis” is dealt with internally in the program as depreciation recapture. You don’t see this. I’m showing it this way for simplicity.

                    Cost Basis         Depreciation      Adjusted basis   Sale Price     Taxable Gain or (Loss)

Land            $20,000              $0                           $20,000            $40,.000               $20,000
Structure     $80,000             $34,787                 $45,213           $160,000              $114,787
Roof             $10,000             $3261                    $6739               $0                           (-6739)
TOTAL         $110,000           $38,048                 $71,951            $200,000            $128,048

With the above you can see that the roof was reported as sold for zero dollars, indicating a loss on the sale of that one asset. So, the $3261 of depreciation is “NOT” recaptured and taxed as ordinary income, when it should be. Additionally, the remaining $6739 to be depreciated (if you didn’t sell the property) is also incorrectly reported as a loss.

Now let’s do it the right way.

                     Cost Basis      Depreciation     Adjusted basis   Sale Price         Taxable Gain or (Loss)

Land             $20,000           $0                        $20,000             $40,.000           $20,000
Structure      $80,000           $34,787              $45,213            $130,000          $84,787
Roof              $10,000           $3261                 $6739                $30,000            $23,261

TOTAL         $110,000          $38,048              $71,951           $200,000           $128,048

Now notice that your total taxable gain is the same in both scenarios above. However, in the first scenario the $3261 of depreciation on the roof is included in the profit on the structure and gets taxed at the higher Capital Gains tax rate.

But in the 2^nd scenario, where you show a gain on all assets, the $3261 of depreciation on the roof is correctly recaptured and taxed at the lower “ordinary income” tax rate.

[LB641]

Thank you again.

The new roof was in 2013 @ $10K. However come 2021 (7 years later) the roof is valued at and sold for $30,000? This where we are confused. I thought everyone was saying add a $1 to the original cost. (IE: $10,001 for the roof). Where is the $30,000 ($20,000 more, come in for a 7 YO roof?

If I have an AC with the cost of $7K, in 2010. Would I not enter a sales price in 2021 of $7,001.00?

And I have to do this with every asset, including those that are fully depreciated?

Can I dispose of assets that we removed and tossed out prior to the sale? How?

Are assets fully depreciated, and those not fully depreciated entered the same way?

This is why it gets confusing - A TTx Expert and "Employee, posted this. It seems to contradict what you and others have said. What are your thoughts on this advice?

"... 

The house sale uses the sale price while the other items need to be marked as sold for $0. The point is to get the remainder of the money spent on those assets subtracted onto your tax return.  Follow these steps:

1. Return to your rental
2. Go to depreciation section
3. As you go through the asset summary,
4. under Tell Us More, mark that it was sold, retired, stolen, destroyed, etc
5. enter the date you stopped using it for rental purpose
6. continue
7. confirm depreciation
8. special handling, select no
9. sales information
10. enter 0 for sale price

Do this for every asset not fully depreciated except the house since the house gets the actual sales price and sale."

[Carl]

I believe you're waaaaaay over thinking this. I refer to this as "complexified simplification". That's where one takes something that is simple and straight forward and makes it as complex as humanly possible. Kinda like instructions I've seen for how to open a car door. (About 27 steps in those instructions.)

I thought everyone was saying add a $1 to the original cost.

No. I said to add ***AT*** ***LEAST*** $1 to the original cost. In my example, You can sell the land for $20,001 ($1 over it's original cost), the structure for $80,001($1 over it's original cost) then sell the roof for $$99,998 and the net result still totals a sales price of $200,000 and all depreciation is correctly recaptured as it should be.

[LB641]

Thank you .  the roof not being fully depreciated. Are the assets that are fully depreciated handled the same way? Thank you for your patience and understanding.   It is appreciated.

[Carl]

Thank you . the roof not being fully depreciated. Are the assets that are fully depreciated handled the same way? Thank you for your patience and understanding. It is appreciated.

All assets are treated the same way. Doesn't matter if it's fully depreciated, partially depreciated, or land that is not depreciated at all, or an asset you purchased that wasn't depreciated because it was installed after the last renter moved out before you sold it, and therefore was never even placed "in service" as a rental asset.