Sale of rental property that used to be primary residence

[b_zaborowski]

I have a question about how to claim the sale of my rental property.  Here's the timeline.

I purchased the house in March of 2006 for 171,500.  It was my primary residence from March of '06 until I converted it to a rental in October of 2013.  Since the FMV at the time of conversion of 114,000, I was required to take the lesser of FMV or purchase price for depreciation.  

It was kept as a rental up to it's sale date in October of 2015, for 148,000.  It's my understanding that it wasn't sold at a loss or a gain since it sold at less than the original purchase price, but more than what it was appraised at during in-service date.  Any guidance would be appreciated.  Thanks.

[cjjqcps]

I have a similar situation but can't find any IRS info that supports the "no loss or gain since it sold at less than purchase price but more than what it was appraised at during in-service date".  Can you elaborate on this?

[PhilC42]

I have the same situation & question.

[seszorcsik]

IRS Treatment is clear - See p. 4 of IRS Publication 544.  

Now, as to how to get TurboTax to report it correctly....

[bellinr99]

where does p4 of IRS Publication 544 support the "no gain provision?" I have the exact same situation. It would be common sense that any gain relative to FMV at the time of conversion that was less than the purchase price would be excluded, I just don't see where specifically. The only exclusion appears to be if the property was not rented for 2 of the last 5 years.  Any help would be appreciated!

[mostlywind]

IRS Publication 551, page 10, explains how to calculate the gain/loss.  Nowhere does it say the answer is "no gain"  I don't see that in Pub 544 page 4 either.

[selwynaccounting]

Hi guys it's in PUB 544, on page 4.

Gain. If you have a gain on the sale, you generally must recognize the full amount of the gain. You figure the gain by subtracting your "adjusted basis" (price you paid plus improvements) from your amount realized (sale price), as described earlier.

What this means is that you only pay a gain if your sale price is more than the price you paid (not FMV at the time of conversion).

But in order to take an ordinary loss on your return, you may be excluded from doing this if the FMV was less than your adjusted basis at the time of converting your rental.

I hope that helps.

[TaxGuyBill · Accepted solution]

You are correct, there is no gain or loss.  However, TurboTax is not set up very well to report this.

In most cases, the sale of Rental Property is sold in the rental section and you sell the 'asset' of the house.  However, if the property was originally a personal-use property and it converted to a rental property when the Fair Market Value was less then the Cost Basis (usually the purchase price plus cost of improvements before it was a rental), it is reported in the "Sale of Business Property" section.

Go into the "asset" for the property in the Rental section, and indicate that you sold it.  When you get to the screen that asks about "Special Handling", say YES.  Then it will ask you to enter the date of the sale (do NOT enter the sales price).

Now figure out how much depreciation you took on the property, including the current year.  It may be helpful to print out the 'Depreciation and Amortization' worksheet (you will need to pay before you print it).  It is the side-ways worksheet.

Then go to "Sale of Business Property".  If it was sold for less than the 'Fair Market Value when converted to a rental', you would say No, it was not sold at a gain, then on the next screen, yes it was sold at a loss.

However, in this situation there is not a gain or a loss.  To property report this, we sort-of need to 'make up' the "basis".  For your 'basis' you enter the total of (1) Sales Price plus (2) total depreciation plus (3) $1.  Then enter the actual Sales Price and the Depreciation where it asks for them.  That should give you a $1 gain and put it on the proper form (that section won't allow a $0 gain/loss).

EDIT: Edited to add the $1 because the "Sale of Business Property" section will not allow a $0 gain/loss.

[PhilC42]

Does this also remove other assets (improvements) that were added to the property (such as new carpeting throughout)? Or do I need to file that as a separate item? (It was added several years ago, and has been depreciated a lot.)

[GoingItAlone]

Yes, I too wonder how to treat the other assets created (improvements). Do I prorate the sales price? What about the land that was not depreciated?

[GoingItAlone]

Does this answer still work?  I see that it is 2 years old and the screens are a bit different. If I follow the above example TurboTax says there is no gain so it removes the entry.  Do I then go back into the asset to sell it instead?

[GoingItAlone]

I see this post is 2 years old.  Does this still work for 2017?  When I follow the "makeup basis" I says there is not a gain and TurboTax will delete the record.  Do I then need to go back into the asset and improvements to pay it off again?

[mbaez99]

I have this exact situation and it seems like there is no way to make TurboTax determine that there is no loss. I basically end up with a huge loss which is incorrect, it should be a loss of $0. I wish there was more help for this, right now in order to make sure this is done correctly it seems like I will have to go to a tax professional and skip using TurboTax this year...

[mbaez99]

Well, I tried TaxGuyBill's suggestion and I was able to have TurboTax then show $-1 loss on the sale, which is close enough to zero. I guess the question is, when filed, does manipulating the cost basis as suggested satisfy the IRS? My concern is that it looks wrong or "fishy" in the filing...

[pk3]

@TaxGuyBill 

• Shouldn't the basis be original cost + selling expenses? Or is the goal here just to 'somehow' get a 0 value for the sale of the business property? 
• And how does depreciation recapture occur under this scenario? 

I'm in a similar situation where I bought a house and lived in it for awhile, started renting it out when it had gone down in value, then sold it when it had recovered to slightly under what I paid.  Having deducted over 15,000 in depreciation, I was expecting to have to pay ~25% of that back because of recapture.

Am I the only one who would like TT to better handle the Sale of a Rental Property? 

• shouldn't we have been asked for info on our settlement sheet, which could have flowed to deductions and basis adjustment
• there should be just 1 place to deal with sale of a rental property instead of 2
• gain, loss, or no gain/loss could all be sorted with a few simple questions

Edit: I had about 1 minute left to e-file so I did it your way. TT did allow a zero amount:

And it shows up on form 4797: