Rented out second home in 2017, so reported rental income. Sold in 2018. Defaulting me to the "Less Common Business Situations". How do I report as sale of second home?

[dannypfs]

We have a second home we have had since marriage 3 years ago (moved out of hers and into mine). In 2017 we rented it out for only a few months so reported rental income. Last year we sold it at a loss. TurboTax defaulted me to the "Less Common Business Situations" for the sale of business property (with depreciation, etc). This is a second home. How do I work around this?

[Coleen3]

Normally this would be a business property, but since you placed it into and removed it from service in the same year, it is not depreciable.You would only enter it if you received a 1099-S for the sale.

However, if you used the property for personal use, then you will not report any capital loss on this sale on your income tax return. (The IRS does not allow a capital loss on the sale of personal use property. This rule applies to the sale of a primary home/second home/inherited home that was a personal use property.)

[cottagecharm11]

I hope you can help me! We owned a home in Oregon that was never our primary residence. We placed it in service in 2001 and stopped renting it after we moved out of state in 2014, at which time we began using it for a second home. We sold it last year, after we moved back to Oregon. We received a 1099S to report the sale. I know we will need to recapture the depreciation and pay taxes on the capital gains. I trying to figure out how to report the income on the 1099S and which IRS Form would I use? I  have all the calculations for reporting the income, but I am not sure which place to enter it?   When I researched it online I saw two options one for Form 4787 and one for Form 8949?  I have tried to enter it under "Business Items" and then "Business Sale of Property", after I answer the questions and fill in the "Gross Sale Proceeds" into the box it pops me out of the interview and back to the "Income Summary Screen", so I am unable to continue.

[AmyC]

@cottagecharm11  Since it was not a rental property in 2020, the program does not want to make it business property sale. Since it was last a second home, enter it on the sch D using form 8949.

You will want to use your adjusted basis with the depreciation deduction for the time it was rented. Keep a copy of how you reached that number and all supporting paperwork with your return.

1. Go to federal income section 
2. click on Add More Income
3. scroll down to Investment Income
4. Show more
5. Stocks, Mutual Funds, Bonds, Other
6. Start:  Continue answering the questions.
   1. Yes,
   2. 1099-B - no,
   3. one sale at a time and the boxes appear for your entries.

[cottagecharm11]

I entered the exactly where you said to using the "Enter One Sale at a Time" area,  for Stock, Mutual Funds, Bonds, Other,  but I must be doing something wrong,  We do owe capital gains taxes according to Schedule D for an amount of gain that is just over $98,000. Our income was very low for the year which may have offset this income. 

I entered  the sale proceeds of $135,500 with an adjusted  basis of $23,059 (after deducting depreciation) and deducted the "Expenses of the Sale" of $14,350  (for Commission, Escrow, Title Ins, etc) and entered the Oregon Dept of Revenue Estimated Withholding  of $5420. Turbo Tax is now showing all of the withheld taxes from Oregon as a refund.  Since we are deducting the capital gains from the original baiss, I assume were are not "recapturing the depreciation" elsewhere? Thanks for your help!

[AmyC]

For the basis of the property it is price paid plus improvements minus depreciation plus selling expenses. Make sure the plus and minus parts are right!

The 1099S is the sales price.

When you deduct the depreciation for each year with no sec 179 depreciation or special bonus depreciation, then you do not have to worry about recapture. If you wrote off depreciation that was supposed to have existed in the future, then you would need to recapture.  You stopped renting in 2014 and any recapture should have been done then when you converted it to personal use. If not, then it should be done now.

That does leave you a big capital gain on your tax return. The federal AGI flows into OR and you should have tax. Something is not right.

See How do I preview my TurboTax Online return before filing? This lets you get the basics of the federal and state. You should see the capital gain on your return. If you have paid for your return, you can see all the forms. 

@cottagecharm11

[cottagecharm11]

In 2014 we did not pay any recapture of depreciation taxes when we converted it to personal use. It never came up when I did the return that year. How do I do that now?

[AmyC]

Did you have any depreciation that needed to be recaptured? Did you write off an entire roof in 2013 so that you had more depreciation than you got out of the property? OR did you only take the depreciation for each year?

If you were writing off whole items and big numbers, then the excess that was written off is added back to the basis.

If you were taking just that year's amount of depreciation each year on each item, then there is no recapture.

See Publication 946, How to Depreciate Property.

@cottagecharm11

[cottagecharm11]

I have gotten all of the information entered as you told me to do. Now I have a new issue.

 I am seeing a “zero” for the tax that is due with a total  income of 80,206. I did some searching at TT to try to find out why this is happening and the Question and Answered solution that I found for this issue is this one I copied and pasted below:

"TT not calculating tax correctly from taxable income”

“My problem is maddeningly simple. According to TT, our taxable income after all deductions and exemptions is $33,230. According to the IRS tax table, for a married couple filing jointly the tax should be $3,599.

TurboTax tells me that our tax due based on our taxable income is ZERO. While I would be happy to pay no tax, I am very uncomfortable with this obviously incorrect outcome. Help!" 

Their  answer was: "Did you enter any qualified dividends or capital gains on your tax return?  If so, the tax tables are Not used.  The Qualified Dividends and Capital Gains Worksheet is used to calculate your tax liability, if any."

This answer fixed the other persons issue, but not mine. So my problem at this point is I need to pay 15% capital gains tax on the proceeds of the sale of the second home, but when I try to enter it manually (because TT does not calculate it for me)  I tried to click on the box to enter it, but TT will not let me. I assume that is because it is supposed to flow from a Form? I do have the TT Form Qualified Dividends and Capital Gains Worksheet that is referenced above filled out. On line 25 of that form it has "zero" for the "Tax on all taxable income". The other forms are  Schedule D, and Form 8949. Any ideas what could be wrong.  I have reviewed everything multiple times and cannot figure this out. Thanks, we really appreciate your help!

[cottagecharm11]

Problem solved...After lots of hours spent researching our zero tax issue, and with the help of another TT tax expert we finally have an answer. It has been determined that because our income, after the standard deduction, was less than $2,000 (before the capital gain) and that put us in the income category to actually pay zero capital gains tax.