Rental converted to personal use then sale in the same year

[Sean_SF]

I had a rental until the end of 2017. And it took 5 months in 2018 for the renovation and sale of the property. I think I can first convert the rental to personal use in 2018 and then make it a sale. But does TurboTax allow me to do both in the same year?  And how to do it?

Thanks in advance for any help or advice.  

[Anonymous]

it may make absolutely no difference.   to qualify for the home sale exclusion, you must have owned and occupied the property for 730 days out of the five years before the date of sale.    you can treat it as a hone sale.  there will be no exclusion if you didn't meet the test above and any depreciation you took will be section 1250 recapture.   or  if you don't qualify for the exclusion, you can ignore the conversion and treat it as a sale of rental property,  the gain will be the same and the depreciation recapture will be the same.

one priviso, if you sold at a loss (net basis after depreciation exceeds net sales price), as a personal residence, the loss wouldn't be deductible.    

[Sean_SF]

Thanks for the quick reply, Hackitoff and I understand there is no difference for the capital gain tax. However, I believe I can deduct 5 months of mortgage/property tax cost if I convert it to a personal use first. Is that right?

[Carl]

 Yes, you can convert the property to personal use if desired. But then when you sell the property you can "NOT" report the sale in the Rental & Royalty Income (SCH E) section of the program. You have to report it in the Sale of Business Property section. But this is going around your elbow to get to your thumb, as it's much more prone to user error.  If you did not live in the house for one single day as your primary residence, 2nd home, or use it as a vacation home for one single day after the last renter moved out, there's no need to convert the property to personal use, and makes no sense to do so if there was "in fact" no personal use of the property in 2018.  Just leave it classified as residential rental real estate.That's the easiest, simplest way to do this and not have to deal with all the *manual* math you will be "required" to do on your own for things such as depreciation recapture and utility expenses.

Just report the number of days rented in 2018 as 1 (one) day. (The program will not accept zero days). Then your rental income will be zero for 2018.

For expenses, you can fully and completely deduct all rental related expenses such as utility bills (electric, water, etc.) and repairs. Then for those things that qualify as property improvements you'll add them to the assets section with 0% business use. (I think the program won't accept zero percent business use, so just make it 0.1% business use. The depreciation will be minimal, if not zero). Then you can report the sale in the rental section and the program will do all the math *for you*.

If you have more questions, please ask. Right now, I'm running a scenario to check out other options for your specific and explicit situation.

[Carl]

Just ran my test scenario. I find that you "CAN" claim it was rented for zero days in 2018.

For any property improvements done after the last renter moved out and before the sale, enter them in the Assets/Depreciation section with the following criteria.

 - Date of purchase will be any date in 2018 that is "before" the closing date of the sale and "after" the last renter moved out.

 - On the "Tell us more about this rental asset" screen, select both "I purchased this asset new" and "This item was sold, retired, stolen, destroyed....."

 - Yes, I have always used this item 100% of the time for business"

 - For the date you first started using it in the business, enter the date you closed on the sale. "NOT" the date the work was completed or the date you paid for it. Then continue.

For "Special handling required" select no.

Then finish working through the rest of the screens. On the results screen you will see your gain/loss and it will also show you that $0 (Zero) depreciation was taken on that asset.

[Sean_SF]

Thank you so much Carl!  I really appreciate your help.

[jeanne17]

"

Then finish working through the rest of the screens. On the results screen you will see your gain/loss and it will also show you that $0 (Zero) depreciation was taken on that asset."

I am following your instructions precisely (adding a new roof as an asset just weeks before selling the rental property), but what would I put for sales price and sales expense for the *roof*? The same amount we paid for it in both boxes? If we put $0, then we don't get any benefit at all so not sure why even add it as an asset....