Sold rental property (which was prior personal residence) - unsure how to answer whether business use percentage varied over the years it was owned.

[khall712]

We sold a rental property in 2017.  The property was our personal residence for 8 years, and then a rental for 4 years.  Turbo Tax is asking if special handling is required with this as one of the criteria: "The business use percentage of this asset varied during the years you owned the property".  I'm not sure how to answer that.  If I say yes, then the help menu just says turbo tax can't automatically compute the sale info - it does not say what to do or what form to use.  I have been using turbo tax the entire time it has been a rental so all the prior data is there. 

[CarolC · Accepted solution]

When the business use percentage varies each year, TurboTax cannot automatically calculate the disposition of an asset.  You will need to make manual adjustments to the return.

However, if the rental property was rented 100% for the last four years (the entire time it was a rental property), then the business use percentage did not change, and you can answer no to this question.

In order to take the home sale exclusion for your personal residence, you need to actually live in your home for two of the last five years.  If you did, then you need to allocate your gain to personal use versus rental use to properly determine your eligible exclusion amount.  Post another question on AXC if you need help with this.

[toddrub46]

I sold a vacation rental property in 2019 and over the years the business use percentage changed depending on how much we used it personally. In the prior response is says one must manual adjustments on the tax return. But what sort of adjustments would need to be made? Depreciation each year was calculated using the business % for that year. 

[MaryK4]

Use that same business % to determine the depreciation that was taken each year it was used as a rental property.

@toddrub46

[thompsam]

Can you clarify what you mean here by  "Use that same business % to determine the depreciation that was taken each year it was used as a rental property."?  I'm in the same situation.  Turbo Tax knows how much depreciation has been taken on the property and on each capital improvement when it imported last year's return.  If the property was always a rental, never converted to/from personal use, but some personal days each year, when entering the business use percentage during these dialog, should it just be 100%?

[toddrub46]

My property was a mixed vacation and rental property so the personal use versus business use was different each year. 

[thompsam]

I'm in the same situation as you and as such, I'm hoping to find out how you handled this in TT since I assume you've already submitted your tax return for the year in which you sold the property.  Did you enter 100% of the business use percentage in the TT dialog where they ask for your "cost", "business %", and "prior deprec"?  Or did you have to somehow manually enter in the business use percentage for each year you owned the property?  If the latter, where did you find instructions/guidance on how to do this?

[ELGG]

I'm having the same problem this year and still don't see a definitive answer here. I sold a rental property that was initially 2/3 business use for 3 years and 100% business use for the last 8 years. TurboTax performed the depreciation calculation for each of those years, so the program "knows" the depreciation history of the property. If I click "No" to the "Special handing required?" question, will TurboTax calculate the  correct capital gain?

[toddrub46]

You're right that TT has calculated the depreciation each year, by asset, and "knows" the cumulative depreciation. However, last year I found that in the TT step-by-step process, it determined the allocation of the sales price and cost basis of the assets for the "business portion" for purposes of completing Form 4797 - Sale of Business Property - using the business-use-percentage in the last year (i.e. year of sale). Since my final year had a far different business-personal ratio than in prior years (in fact every year was different) I concluded this was incorrect -- You have probably noticed each year that as the business use % changes, so does the depreciable cost basis amount and therefore the depreciation deduction even if using straight line.  So I developed an historical weighted average of business versus personal use which I then used to allocate the sales price and cost basis of each asset. This required me to use the "Form" view in TT and to override cell amounts for each asset in Part III of Form 4797 for lines 20 (gross sales price) and 21 (Cost or other basis). Note that line 22 (Depreciation) should come straight from the TT accumulated depreciation calculations you referred to; these do not and should not be overridden. You then should get a reasonable allocation of the gain on sale between the business and personal portions for purposes of Form 4797 and Schedule D. I would also recommend that you complete IRS Publication 523, worksheet 2 - "How to Figure Your Gain or Loss" for both the business portion and the personal portion of the asset you sold, using the same historical weighted average of business versus personal use I referred to above. 

Please note that I am not an expert and what I described above is something I figured out after playing around for hours with TT to get something that made logical sense. 

[fromaz]

Would you please elaborate how you develop the historical weighted average to allocate the sales price vs the cost basis? I am trying to do the same for a vacation home which had 40% business use in the first two years and 100% business use in the last year before we sold it. Thanks for your input. Appreciate it. 

[toddrub46]

I simply added up all of the personal vacation use days and all of the business use (I.e. rented) days over the time of ownership and developed the % of one versus the other.