How do I report the sale of rental property?

[omarhass]

Hi, 

I have a follow-up question about how to report the sale price of the rental property that was rented only for a fraction of the time that I owned it. For example, it was rented for about 78% of the time that I owned it. The rest of the time my kids lived in it.

So should the reported sale price be multiplied by 78%(.78)?

Thank you

[Hal_Al]

@omarhass  said "I have a follow-up question about how to report the sale price of the rental property that was rented only for a fraction of the time that I owned it. For example, it was rented for about 78% of the time that I owned it. The rest of the time my kids lived in it."

Q. So should the reported sale price be multiplied by 78%(.78)?

A. No.  The entire (100%) capital gain is taxable. You have  a 2nd home (your relatives used it after being a rental). The sale of a  2nd home (personal use property) is taxed as a capital gain at the same tax rate as the sale of rental property.  Unlike the sale of your  primary home, there is no special tax treatment for the sale of a 2nd home. In addition, you need to recapture the depreciation claimed (or allowed) during the rental period.

You need to enter it as the sale of "business property".  

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

- Business Items

   - Sale of Business Property

[Anonymous_]

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@andryvotty wrote:

If you sold the rental property for $500,000 or more, you will need to report the sale on Form 1099-S. 

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There is no magic number here with respect to the sale of investment or rental real estate. Further, the party responsible for closing the transaction is also responsible for filing the 1099-S (and that's usually not the transferor).

See https://www.irs.gov/instructions/i1099s#en_US_202201_publink1000280429

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@andryvotty wrote:

If you sold the rental property for less than $500,000, you will need to complete Form 8949 and Schedule D to report the sale. Form 8949 is used to report the sale of capital assets, such as rental property...

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Again, there is no magic number, but the sale of rental property (subject to depreciation recapture) is reported on Form 4797; real estate held for rental purposes is essentially business property.

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@andryvotty wrote:

If you have taken depreciation on the rental property over the years, you may be subject to depreciation recapture when you sell the property. 

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With respect to rental real estate, the owner is subject to depreciation recapture whether or not depreciation deductions have been taken over the years (recapture is based on depreciation deductions "allowed or allowable"). 

[omarhass]

Thank you for the helpful replies, appreciated.

So how come the turbotax software has this field that's asking about how long or the percentage the rental property was used for business?

If I keep the field empty the Turbotax software, the tax portion I owe is much higher than when it's filled in with 78%.

Please clarify the significance of this field and why it's affecting the amount of tax owed for the property sale.

Regards,

-Omar

[Anonymous_]

You mentioned earlier that your "kids lived in it [the property]", which clearly constitutes personal use.

Did they use the property before, during, or after the rental use?

[omarhass]

My kids lived in it for a period that was sandwiched between two rental periods.

[Anonymous_]

The expenses during that period then become non-deductible on Schedule E (mortgage interest and property taxes during the personal use would be reported on Schedule A, subject to limitations).

Also, depreciation would not be allowed during personal use so you would have a lower recapture amount than if the rental use had been 100%.