Sale of rental property that used to be primary residence

[jerryrobichaux]

Hey TaxGuyBill,

In the same boat, on converting primary home to rental, and then selling between (the FMV+improvements) as the basis and (the original purchase price+improvements) as basis. By adjusting the basis to the sales+depreciation will zero the "gain" or "loss". This seems consistent with Publication 544, page 5.

Just wondering has anyone had an issue with this adjustment?

Also, thanks a ton for posting your explanation.

[KrisD15]

If your property fell between the FMV at the date put into service and your cost plus improvements on that same date, you would zero out the gain and/or loss, however you need to recapture the depreciation. 

Any improvements made after the date placed into service would need to be listed as separate assets. 

For example, if you replaced the roof on the rental, and the cost to replace the roof was 5% of the home's basis, you would need to allocate 5% of the sales price to the roof and claim the gain if any.  

[overland0715]

Hi, I am in the same situation.

After filing your tax return, did IRS accept your return? Did you have any issues afterward?

Thanks in advance for your reply.

Best,

Overland

[fallidina]

Hello Turbo Tax experts/community,

This post is from 2019 and I am doing 2020 taxes and have the similar situation. How are we to report this using TurboTax 2020? Was TurboTax2020 fixed to capture this scenario as explain in Publication 544 page 4?

Please response as I am waiting for an advice.

Thanks.

[overland0715]

For my 2019 Tax return, I could not do it through Turbo Tax, so I found a CPA to do my tax return. Surprisingly, not many CPAs seemed confident enough to handle this situation. So you better hurry to find a confident CPA who knows what to do in this case. Good luck! -Overland

[fallidina]

Hello Overland0715,

Thanks for your prompt reply. So how differently did the CPA do this?

Was form 4797 prepared where Part1 line 2:

column d was the gross sales price (as expected)

column e was the total depreciation taken (as expected)

column f was the correct fair market value (and not the misleading value suggested by the original post to make TurboTax work)

column g was zero (eventhough if you do the math as specified in Publication 544 page 4 it was equating to a positive number but zero was used by following Publication 544 page 4 instructions)?

Waiting for your response.

Thanks.

[overland0715]

In the Form 4797,

Part I is empty except for "0" in the line items 6 and 7.

Part II is empty except for "0" in the line items 13, 17, and 18b.

Part III, the line item 19 has the address of the property sold with the dates accquired and sold.

there are values filled out in 20~24.

For example,

line 20: $100,000

line 21: $130,000

line 22: $30,000

line 23: $130,000

line 24: $0

I think the line item 22 "Depreciation" allowed or allowable is made up to be the difference between the line 20 and 21 such that the line 24 becomes 0.

Also following line items(26a,c,g, 30, 31, 32) have "0"  

Hope this helped. -Overland

[overland0715]

Correction: In the example, the line item 23: $100,000 (= same value of the line 20)

[fallidina]

Please see if you dont mind answering the below.

Much appreciated. Thanks.

line 20: $100,000   <-- Is the gross sales prices.

line 21: $130,000   <-- Is the correct cost basis, which is Fair market value (not original purchase price) plus selling expenses. Or was this the amount made up to cause a zero affect (which is what the original post suggests to be done)?

line 22: $30,000     <-- Is the total depreciation taken.

line 23: $100,000   <-- line 21 minus line 22

line 24: $0                <-- line 20 minus line 23

What I was expecting to see in your example was that the sales prices (line 20) was indeed more than the adjusted basis (line 23), which means one made a gain but that gain was not more than from perspective of original purchase price (as a real gain would have been if one had sold at more than thier original purchase price and not more than the fair markert value at time of conversion) and thus it is not a real gain and zero is to be used instead.

Below is the Snapshot from Pub 544, page 4 (2020 version)

Figure the loss you can deduct as follows.
1. Use the lesser of the property's adjusted basis or fair market value at the time of the change.
2.Add to (1) the cost of any improvements and other increases to basis since the change.
3.Subtract from (2) depreciation and any other decreases to basis since the change.
4.Subtract the amount you realized on the sale from the result in (3). If the amount you realized is more than the result in (3), treat this result as zero.The result in (4) is the loss you can deduct.

[AmyC]

Figuring a gain uses the highest numbers, the amounts actually paid.

Figuring a loss uses the smallest numbers, the conversion FMV values.

This leaves a range between as no gain or loss.

[fallidina]

Hello AmcyC,

Thanks for your response. Much appreciated. If you could respond back to my below questions, I would be so thankful.

I understand your answer and the reasoning/logic/math behind it.

So my sale of rental property that used to be my primary residence falls in the inbetween range so no gain or loss should be reported to IRS.

But the issue is:

1. How are we supposed to get TurboTax Premier 2020 to calculate it correctly so that its shows no gain or no loss?

As when entered (by following the software prompts) it finds a gain (where my sale price is above the FMV but much below my original purchase price). I can share the math if needed, let me know.

As of now, Form 4797, part 1 gets populated with line 2 as follows:

a.  property description

b. date purchased

c. date sold

d. gross sales price - which is more than my FMV but less than my original purchase price

e. total depreciation taken

f.  cost basis which is my FMV plus selling expenses - which is less than my sales price and my original purchase price

g. gain or loss - Math done by software is: line 2d plus line 2e minus line 2f which is resulting into a gain which is correct math but since my sale falls inbetween the range (as discussed in your answer), this should not be a gain nor a loss, thus a zero but its not.

2.  I can get the software to work and show a zero but that requires "sort of" making up the cost basis (as original post suggests) which I am debating on doing or not. Thus, if the software is not able to do this correctly, what form can I manually fill to report this correctly and which part/section/lines in that form need to be populated would be a great help if you can share. 

3. Would you say that even when form 4797 is manually done, part 1, line 2g should be put down as a zero even when you do the math it asks to be done results into a positive number?

[overland0715]

line 20: $100,000   <-- Is the gross sales prices. (Yes)

line 21: $130,000   <-- Is the correct cost basis, which is Fair market value (not original purchase price) plus selling expenses. Or was this the amount made up to cause a zero affect (which is what the original post suggests to be done)? (I do not know what exactly my CPA did, but the line 21 could be the made-up adjusted cost basis to cause a Zero net result as suggested by the original post.)

line 22: $30,000     <-- Is the total depreciation taken. (I think so.)

line 23: $100,000   <-- line 21 minus line 22 (Yes)

line 24: $0                <-- line 20 minus line 23 (Yes)

[BULLTRADER1964]

Hello, AMYC and any other tax experts.  If you have no gain or loss because your sales number falls between the two basis original purchase price and FMV price at time of conversion to rental.  How does one report on the FORM 4797 on Turbo tax?  Do we say loss and modify the basis to be zero??? By making the cost basis equal the proceeds, netting out to a zero transaction??

[AmyC]

See Publication 523 page 11and follow those steps for your situation. You may end up zeroing out but I would rather you know that you are following the correct steps for you.

@overland0715

@BULLTRADER1964

[Kev27]

I purchased a condo in 2006 for 142k.  I lived in it until August 2014 and immediately started renting it 9/1/2014 because the value was horrible and I still owed over 100k.  I never moved back in it.  I listed it for sale in June 2021 after learning my renter was not renewing.  My renter left middle July 2021 and until the sale closed for 120k in September 2021 I never moved back in the unit.

My FMV for tax purposes was set in 2014 at 101k (95k for the unit and 6k for the land).  Not sure how to go forward, but the steps in TT Premier are not generating a Form 4797.  I'm pretty I at least have depreciation recapture, but TT is not populating it when I put in the figures.  Any suggestions on how to manuever through TT Premier to accurately record the data?  Thanks for any assistance