Sale of Rental Property if FMV when converted to rental was lower than original cost

[vtdrevil]

Trying to verify whether Turbo Tax can properly handle the reporting of the sale of our rental condo.

We purchased a condo in 2006 and converted it from our primary residence to a rental in 2015.  FMV at the time we converted it was far below our initial cost, so we used the FMV as the basis for rental depreciation.  The value of the condo since appreciated and we sold it in 2020 for a profit.

Renters moved out mid-October 2020 and we closed on the sale of the property at the end of November.  I know that we need to pay taxes on the recapture of the depreciation, and then also capital gains. 

In a response to another question on the forum, I read that Turbo Tax wasn’t set up well to report the sale of a condo when FMV at the time it was converted to a rental was lower than original cost, but from other questions, it looks like I should be able to do it if I report it as a sale of business property.

If I can use TT, can anyone please help me with what I need to do to make sure I report this correctly?  Thank you so much!

[MikeinSC]

The tax law, as I understand it, will allow you to use your original cost vs the adjusted depreciable basis when computing this gain (you still need to recapture depreciation on the sale), but if adding the amount of the original reduction you made creates a loss, you cannot take this loss.  If you still have a gain after adding that amount back, you can use that in your basis.

I would add an amount as a separate item as a basis adjustment, as in a cost of the sale, to see if there is a gain or a loss.  If you have a loss you will have to reduce that amount, if you have a gain, you are good to go.

Sale will be reported on form 4797 to see the computation of gain/loss.

[AmyC]

Yes, the software can handle the differences. The program will ask for your basis when you sold it. There are the costs of purchase, sale, and improvements before it became a rental to include in the basis along with the purchase price.

The program knows about the depreciation and will handle that part for you.

[AmeliesUncle]

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@vtdrevil wrote:

In a response to another question on the forum, I read that Turbo Tax wasn’t set up well to report the sale of a condo when FMV at the time it was converted to a rental was lower than original cost,

but from other questions, it looks like I should be able to do it if I report it as a sale of business property.

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Correct.

Maybe.  If you have GAIN using the Adjusted Cost Basis (after factoring in depreciation and other adjustments to Basis), you can MANUALLY enter it in the "Sale of Business Property" section.  Do NOT enter the sale in the rental section (say "yes" to the "Special Handling" screen when going through the "assets").

If you do NOT have a Gain when using the Adjusted Cost Basis, the program is of no help, and can be quite misleading and give you REALLY wrong results.