We sold rental property to our child at a loss.

[DaveCVIS]

Gift of equity TBD and reported on 709.    1099-S will report the 2020 sale 100k lower than our original cost basis (2016).  We cannot deduct the loss because of sale to a family member. In the interview, TurboTax does not seem to (?) ask or allow for this ‘family’ differentiation and is allowing the loss to be reported and deducted. How should this be handled within the tax software? Thank you.

[Carl]

I have the Desktop version of H&B and get the same thing. I'm not asked if the sale was to a relative/family member. I suspect this is because at this early stage, the program is not yet complete - at least not in the 4797 or SCH D arena yet. Traditionally, the program was not anywhere close to complete until the latter part of January. So it's probably a matter of just waiting it out at this point.

[DaveCVIS]

I went back and used the updated 2019 version of Premier, using hypotheticals. Same thing. The software also does not seem to take into account sales to family members resulting in a loss, which are not deductible.  ??

[Rick19744]

Two things here:

• @Carl if you are not able to find a solution in TT software, you should bring this up in the lounge.
• @DaveCVIS , if there is not a solution by the time you need to file your tax return, just adjust your basis so that there is no loss; essentially breakeven.  

[tagteam · Accepted solution]

I will only add that there are quite a few, typically more complex, scenarios that TurboTax simply does not handle, or does not handle well. 

As a result, this may be an appropriate tax year for @DaveCVIS to consult with a tax professional and, possibly, have the tax return professionally prepared.

[DaveCVIS]

Will reducing the cost basis significantly from that which has been used previously for calculating depreciation of the rental property be a flag for the IRS?  Will older tax forms need to be amended if we now change the real estate cost basis?   Will depreciation need to be recalculated going back to the date placed in service?   We will seek CPA advice in the matter.  Thanks for your reply.  Much appreciated.

It would be great if during the TT interview, the question is asked, "Was the sale of this rental property to a family member?"     If "Yes," then the software manages the appropriate reporting.

[Critter-3]

There are some situations the DIY program is weak even when fully functional  and this is one ... I highly recommend you either upgrade to one of the LIVE options in the ONLINE program  or   seek local professional guidance since you will also need to file a gift tax return which is not in the TT system.  

[Mike9241]

agreed this is a situation TT cannot handle. changing cost basis will result is a change in depreciation history which will change the gain/loss so this could be an audit flag.   see a pro.

[Carl]

Will reducing the cost basis significantly from that which has been used previously for calculating depreciation of the rental property be a flag for the IRS?

It could be, because changing the cost basis on your 2020 tax return will also reduce the amount of depreciation taken in 2020 up to the closing on the sale. More than likely no depreciation will be shown because it totally screws up the depreciation history, and the program *will* take that into account - thus resulting in incorrect figures.

Will older tax forms need to be amended if we now change the real estate cost basis? Will depreciation need to be recalculated going back to the date placed in service?

We will seek CPA advice in the matter. Thanks for your reply. Much appreciated.

Basically, the only way to change the cost basis of an asset is by including IRS Form 3115 - Change In Accounting Method form with your return. This form is "NOT" as simple as it may seem either. Besides, your situation does not call for a change in cost basis in any way, shape or form.

One thing you may be able to do so the program will do things correctly, (I'm assuming it will) is to report the actual sale of the rental in the "Sale of Business Property" section. This would allow you to make adjustments as needed, but also has the same possibility of raising flags. It might raise flags if you use a lower cost basis in the Sale of Rental Property section, than you used for depreciation in the SCH E section of the program.

It might work out fine though, if you report the sale of a percentage of the property (thus, using a percentage of the cost basis) equal to the amount paid for the property. Then show the unsold percentage as a gift - which as you aleady know would require the IRS Form 709 to be filed.

It would be great if during the TT interview, the question is asked, "Was the sale of this rental property to a family member?" If "Yes," then the software manages the appropriate reporting.

If I recall correctly (and I may not) I do think that question is asked. If not asked in the SCH E section, then in the "Sale of Business Property" section. However, since we know for a fact the program is not yet complete, it's more likely they've not got that option ready yet.

[tagteam]

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@Carl wrote:

Basically, the only way to change the cost basis of an asset is by including IRS Form 3115

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You do not use Form 3115 to change the cost basis of an asset.

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@Carl wrote:

It would be great if during the TT interview, the question is asked, "Was the sale of this rental property to a family member?" If "Yes," then the software manages the appropriate reporting.

If I recall correctly (and I may not) I do think that question is asked. 

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The question concerning selling to a family member is not asked in the program, in the business section or the rental section. There is a general question as to whether or not the asset was given away (i.e., a gift, as in donated to a charitable organization or to a private party).

[AmeliesUncle]

In the rental section, when going through the asset say YES when you get to the "Special Handling" screen.  Then:

Option #1:  Report the sale in the "Sale of Business Property" section.  Adjust your Basis to result in $0 gain/loss (actually, if I remember correctly, that section of the program has a problem with that; if so, adjust so it shows a $1 gain).

Option #2:  Report the sale as a personal home sale.  It will report it on the wrong form (8949 rather than 4797), but it will properly limit it to a $0 loss.

Option #3:  Go ahead and report the sale in the rental section (say "no" to the Special Handling question) and show the loss.  Then to the "Sale of Business Property" section and report a sale that shows an equal amount of gain.  You can call it something like "Offset for non-allowable loss".  The net result will be $0 gain/loss.  

Personally, I would go with option #1.

[tagteam]

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@AmeliesUncle wrote:

In the rental section, when going through the asset say YES when you get to the "Special Handling" screen.  Then:

Option #1:  Report the sale in the "Sale of Business Property" section.  Adjust your Basis to result in $0 gain/loss (actually, if I remember correctly, that section of the program has a problem with that; if so, adjust so it shows a $1 gain).

Personally, I would go with option #1.

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I agree; that approach appears to be the cleanest one with respect to entering this transaction in TurboTax. After all, this is part gift, part sale so the unadjusted basis in the hands of the transferee (family member) will be the greater of the amount paid or the transferor's adjusted basis at the time of the transfer (per Reg §1.1015-4(a)).

@DaveCVIS should note that the program will ask for the gross sales price and, later, the gross proceeds as reported on Form 1099-S and should ensure that both of those figures are the same when entered into the "Sale of Business Property" section.

[DaveCVIS]

If I go to Form 4797 and ‘override’ the loss on line 18b to be zero (0.), that removes the loss (and adjustment to income) on 1040, which is compliant.  Maybe in 4797, I could add a note in the Description of Property, “Related Sale, Loss Not Allowed?” Could it be this easy? The instructions for line 18b in 4797 do advise to “Redetermine...”

If I do this, all numbers reported are consistent and accurate.   The cost basis will remain the same (no need to 'drastically' change that),   2020 depreciation will also be consistent with depreciation history. 

[tagteam]

It is not, generally, a good idea to do hard overrides directly on the forms (unless absolutely necessary). First, doing so will negate your ability to e-file your return. Also, the TurboTax accuracy guarantee becomes null and void. Finally, other issues may arise with respect to programmatic flow through items on other forms.

In any event, the second part of the form, with certain exceptions, is primarily intended for property held one year or less.

[AmeliesUncle]

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@DaveCVIS wrote:

Maybe in 4797, I could add a note in the Description of Property, “Related Sale, Loss Not Allowed?” Could it be this easy? The instructions for line 18b in 4797 do advise to “Redetermine...”

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Overriding will void your ability to e-file.

My option #3 is similar to what you are saying, and is probably the correct way to do it (that is how you are supposed to enter a home that qualifies for the $250,000/$500,000 exclusion).   But it is more tedious in TurboTax, which is why I suggested option #1.

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@DaveCVIS wrote:

2020 depreciation will also be consistent with depreciation history. 

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You DON'T change the Basis in the rental section, otherwise that will mess up the depreciation.  That is why in I said in the first two options you say YES to the "Special Handling" screen ( which means the sale in not reported in the rental section). 

Entering a different Basis in the "Sale of Business Property" section will NOT affect the depreciation.