Rental Property Sale

[HopTime745]

Hello,

I have a few questions concerning rental properties in TurboTax.

First, when I fill out the depreciation for my rental property, it takes me to a page about the prior depreciation for the property. It already has the depreciation calculated, and says the calculation should be correct based on the information I have entered. But when I look at my previous tax years (which I did with a tax professional, not TurboTax), there is no depreciation taken in any of the past years. So I put 0 for past depreciation. Is this correct? Am I allowed to do this, or is TurboTax's calculation correct and I should just use that? I have read conflicting articles on line, with saying that regardless of depreciation in past years, the IRS wants the total depreciation from the previous years regardless of whether you actually took them or not in the tax forms.

Related to this, when I report the sale of a rental property, again in the depreciation section, it calculates the AMT depreciation and says this should be correct and to use that unless I have a correction to enter. But I can see in my previous tax forms that my tax professional did not take any depreciation over the years. So I put in 0 for depreciation. Again, is this allowed? I have read online that you must include the depreciation basically as calculated by TurboTax regardless of whether you actually took the depreciation in previous years. Is this true? Did my professional make a mistake in previous years? Would I need to then amend my previous years' returns to claim the depreciation which I am now forced to recapture when I sell the property?

In the final page of the sale of rental property, it says you might have to report unrecaptured section 1231 losses. I tried following the instructions but could not determine whether this applied to me. It says to use the earliest of the previous five years' tax returns that has a loss in line 7. Does this mean line 7 of form 1040? I was confused because on my 2018 return line 7 is adjusted gross income, while on the 2020 return line 7 is capital gain or (loss). How exactly should I determine whether unrecaptured section 1231 losses apply to me?

When filling out the sale of rental property, it asked whether special handling was required. I put no and it seemed to be the right choice, but in the special handling requirements page it says say yes if this asset is a rental, home, home office, or home office improvement, which my property seems to be. Why is this worded like this when clicking no clearly takes you to the page to submit the sale of rental property information?

Finally, there was a question of whether you made any business purchases of $2500 or less during 2021 for business, rental property, or farms, etc. I said yes and it asked whether I wanted to depreciate the expenses or take a one time annual expense. I chose one time annual expense and I believe it took me to a page that said to then enter my rental purchases in Miscellaneous Expenses section of the rental property. That is what I did. But when I tried to review my selection again, it never showed me that page again. It just took me to the rental property review page. I want to make sure that is what I am supposed to do. And, if I chose to use one time annual expense deduction for some assets, must I use that for all other assets for the 2021 return (meaning I can't depreciate other assets)? And is this choice just for the 2021 return or does it apply to all other returns in future years?

Thanks for your help.

[ColeenD3]

You must take depreciation. If indeed, your prior preparer never took it, you need to file Form 3115. You can't just make up for it in one year. You should look back at every Schedule E that you have to make sure he never once took it before filling out Form 3115. It would be listed on Line18 Depreciation expense or depletion.

Unfortunately, the depreciation recapture is "allowed or allowable" meaning even if you never depreciated it, you would still have to recapture the depreciation. Depreciation taken would be on line 18 of Schedule E.

One solution is to elect an accounting method change and file a Form 3115 in the current year and take the prior depreciation as a section 481(a) adjustment. [land  value is separated, land is not depreciated]

Below are the IRS links related to the change in accounting method. TurboTax does not have that form.

Maybe these will help

Form 3115, Application for Change in Accounting Method

Change-in-Accounting-Method

Instructions for Form 3115 (03/2012) 

Instructions

Form 3115,

Form 3115

[HopTime745]

Thank you for your response.

That is what I thought. All articles I read online said you must recapture depreciation regardless of whether you claimed depreciation in the past. What confused me was why TurboTax said to write down the total depreciation from prior years by looking it up in your previous returns. Doesn't that contradict that you must take depreciation? Why does TurboTax let you adjust the depreciations if you must take them? Should I just simply use the numbers TurboTax automatically calculates? And why does the sale of rental property have AMT depreciation (what is AMT depreciation)?  Why not "regular" depreciation?

What about the special handling page or the expenses less than $2500 page? What about the recaptured section 1231 losses? Can you help me with those questions?

Thank you for your help. Much appreciated

[HopTime745]

Sorry, I just reread your post and may have misunderstood. I did check line 18 on Schedule E for previous years and zero depreciation was listed for all years. Does that mean I can then write zero for depreciation taken in previous years when I report the sale? Or must I still use what TurboTax says the depreciation should be because the IRS requires depreciation recapture regardless of whether it was claimed on previous returns or not? Does what you were saying about Form 3115 need to be done if I want to then claim the depreciation that my preparer did not claim in the previous years? Regardless, I still need to use the TurboTax depreciation amount for this year even if I fill out Form 3115?

[HopTime745]

For example, is this article just plain wrong: https://newsilver.com/the-lender/do-you-have-to-depreciate-rental-property/

At the end of the article, it says: "Importantly, you only pay depreciation recapture tax on the amount that you have claimed while owning the property."

This is why I am confused. Conflicting reports everywhere I look.

[PattiF]

Yes, Form 3115 does need to be used to report a change in accounting method to claim the depreciation that was not calculated in previous years. 

The article that you cited above assumes that the depreciation was calculated every year.

• "The first thing you will need is the cost basis of the property, in our prior example $50,000. This should have been computed at the very beginning when you started taking depreciation. Generally, this amount is somewhat close to what you originally paid for the property.
• Next you need to compute the total depreciation that you took (or that you should have been taking). Say, in our case, we took a total of $10,000. If you had a professional prepare your taxes this is probably included as a schedule in your last year’s tax filing. A lot of the online tax software programs miss this information.
• Then you subtract the amount of depreciation taken (or that should have been taken) from the original cost basis. This is known as the “adjusted cost basis” of your property, in our example it would be $40,000.
• Next you need the amount you sold the property for minus any fees or commissions. This is known as your “net proceeds.” In our example, say we sold it for $60,000 and paid $5,000 in selling costs, so our net proceeds would be $55,000.
• Take the net proceeds figure and subtract from it the adjusted cost basis: $55,000-$40,000=$15,000. This is the amount of gain you have realized.
• Compare your realized gain with your depreciation expense: $15,000>$10,000. The lower of the two figures is the amount the IRS considers subject to depreciation recapture at your ordinary income tax rate. In this case, $10,000 is subject to depreciation recapture at your ordinary income rate. The remaining $5,000 is taxed at the capital gains rate."

From Kiplinger​​​​

[HopTime745]

I really don't mean to be a bother, but where in the article that I linked does it assume that depreciation has been taken each year. Doesn't "Importantly, you only pay depreciation recapture tax on the amount that you have claimed while owning the property" specifically mean that if you didn't previously take depreciation, you don't need pay depreciation recapture tax?

[PattiF]

Although depreciating a rental property is voluntary, the IRS doesn’t see it that way if you sell. The IRS will assume at the time of a sale that you have been taking the deduction and will expect you to pay a depreciation recapture tax, if necessary. 

If you failed to calculate the depreciation when you should have,  you can file amended tax returns for mistakes going back up to three years. For older errors, you’ll need to complete IRS Form 3115, or the Application for Change in Accounting Method. 

In any event, the rules governing depreciation and deductions for rental properties can get very technical, and they do sometimes change. For those reasons, an investor needs to work with a tax accountant on managing the tax treatment of any rental property.  

[Vicky1234]

I sold my rental property in 2021.  Is the Asset Sales Price the price I sold it for and what do I put for Asset Sales Expenses?

[Vicky1234]

I have been taking depreciation on this property since 2011 but I am confused when it comes to the sales information.

[DianeW777]

The sales price will need to be separated for building and land, and other assets you might have listed on depreciation that were also sold.

The sales price is what you sold the property for and the selling expenses would be part of your settlement statement.  Here is a list of examples.

• Real estate commissions
• Transfer tax
• Legal fees
• Advertising fees
• Home inspection reports
• Title insurance
• Geological surveys
• Loan charges (points) or other fees paid on the buyer's behalf

Sales expenses do not include:

•  Mortgage payoffs
•  Home equity loan payoffs
•  Rent-back costs
•  Payoff to creditors
•  Property taxes
•  Home owner association fees

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

I hope this example provides clarification to enter your sale.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Income & Expenses
2. Under Your income and expenses, scroll down to
3. Rental properties and royalties, click Edit/Add
4. Do you want to review your rental?, click Yes
5. Under Rent and Royalty Summary, click Edit
6. Click Update to the right of Assets/Depreciation.
7. Do you want to go directly to your asset summary?, click Yes and Continue
8. Click Edit to the right of each asset to be disposed
9. Go through several screens until you get to Tell Us More About This Rental Asset
10. Click on This item was sold…….   And continue to answer the questions

You might also review information here.