Good deal. Now I"m convinced we're on the same page. I few things to point out, and then a decision by you on what direction you want to go. My intent is to educate you so that you can make an "informed" decision on what's the best course of action for "you". What I think is best just doesn't matter for your specific situation. It's your property and money - not mine. 🙂
1. First, since you have no amortization this was probably one of those loans where the lender (or someone else such as the seller) paid all of your closing costs. If so, then you would have nothing to amortize/deduct for that. (See first two sentences of #3 below) To somewhat confirm that, for the property itself (and the property only) add together the amounts in the COST and COST (NET OF LAND) columns. If that total exceeds the contracted sales amount as shown on line 100 of the HUD-1 closing statement you received at the closing when you purchased the property in 2006, that pretty much confirms that you did not pay any closing costs.
2. Now on your 90% personal use, please confirm that it was 90% *every* *single* *year* you had the property classified as a rental. As I recall without going back and reading, you stated that you and the family did use it for personal pleasure for a month each year. But I don't recall seeing you specify "every year". If you did, then the below "reporting sale of rental" will apply - but not perfectly. It's just guidance. Make sure you read "ALL" of the small print on each screen as you work through each individual asset. I'm not absolutely certain, but I "think" you'll be told to report 10% of the sale elsewhere in the program. (I hope not. Last time I dealt with this was over a decade ago. So my memory may be rusty on that.)
3. The $25K in property improvements done "before" the property was placed in service could have been entered either of two ways. Which way doesn't matter. But you "may" have to take that into account when dealing with my item #1 above.
A. The property improvements could have been entered as a physically separate line item, and they would just have the same in-service date as the property itself. Those improvements would have the depreciation value in the "Cost (net of land)" column and the "land" column would have a zero in it, or be left blank.
B. The property improvements could have been included in the cost of the property itself, thus making the amounts in both the "Cost (net of land)" column more than $25K higher than what you paid for it as shown on line 100 of the HUD-1 closing statement.
Since the "pre-conversion to rental" property improvements were done prior to placing the property in service, either A or B above is perfectly fine.
4. These property improvements "should" have an in service date that is "after" the original property was placed in service. If so, and they show a business use percentage, then you're fine.
5. I am assuming the $15K of property improvements here were completed after the last renter moved out, and prior to the sale. That's the only reason I can see why they were never placed in service. Is my assumption correct? If so, then it's still no problems. But they "do" need to be listed in the assets/depreciation section. (They are listed there, if they appear on the 4562 with zero percent business use.) If my assumption on this item is wrong, then please provide details and explain, as it will affect how you will report this sale so it's reported correctly.
7. Just be aware that when you report this sale, you "may or may not" have a taxable gain. Remember, all the depreciation you've taken over the years gets recaptured and taxed in the tax year you sell the property. So your original cost basis of $400,000 will be reduced by the $50,000 of depreciation taken, giving you an adjusted cost basis of $350,000. So that's a $50K gain on the sale. A portion of that will be offset by your closing costs. So this is just a "heads up" to not be surprised when you find you have a taxable gain. In fact, it's almost assured you will if you had 10% personal use every year since you converted it to a rental.
Now here's that guidance I've probably had you drooling for, for a few days now. Remember, since the property was not 100% business use, this guidance "may" seem to start falling apart on you. So the important thing is to read the small print on each screen as you work things through, and have pen/paper with you to take notes, if the program tells you to report something in another section of the program.
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 have 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.
