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Johndwjr
Level 1

Rental converted to primary in 2015 and sold in 2021

I'm trying to figure out how to make this work with TurboTax.  Rental property was purchased in 2013 and rented until 2015 when it was converted to my primary residence.  I left the property in TurboTax as a rental with no expenses/income from 2015 to 2020 as a placeholder to carry forward losses/depreciation until I was able to claim them last year.  I sold the home this year and now need to recapture the depreciation taken from 2013-2015 as well as 2/7ths of the gain from the sale.  What's the best way to approach this issue?  

9 Replies
Carl
Level 15

Rental converted to primary in 2015 and sold in 2021

I left the property in TurboTax as a rental with no expenses/income from 2015 to 2020 as a placeholder to carry forward losses/depreciation until I was able to claim them last year.

That was a dire mistake.  Depreciation stops on the date the property is converted to personal use.If you did not convert the property to personal use on your tax return, then you have been taking depreciation since you started uses it as your primary residence. That's a deduction you were not entitled to and were not supposed to take. Additionally, since your error was for more than 2 years, simply amending is not an option. You need professional help to fix this and correctly report the sale so that the correct amount of depreciation will be recaptured, and the correct amount of gain will be taxed. If your state also taxes personal income, this will most likely be a double whammy.

 

 

Johndwjr
Level 1

Rental converted to primary in 2015 and sold in 2021

Hey Carl.  Thanks for the prompt response.  I apologize for not being clear.  I had an accountant doing my taxes in 2015 and 2016.  He stopped taking depreciation when I converted the property.  For 2016 he simply listed the property as a rental to carry forward suspended losses with no rental income/expenses or depreciation claimed.  I did it the same way for the following years until I had the opportunity to claim those losses last year.  It was simply a placeholder.

 

I think I may have found the way to properly record the information.  It looks like I have the ability to enter prior  depreciation as well as non-qualified use of my primary residence under the "sale of home" section questions.  If I enter the numbers correctly I think I can just then delete the rental.

 

 

Carl
Level 15

Rental converted to primary in 2015 and sold in 2021

Just report the sale in the "Sale of Home (Gain or Loss) section and you'll be fine. You'll be asked for non-qualified use, as well as prior depreciation already taken.

For 2016 he simply listed the property as a rental to carry forward suspended losses with no rental income/expenses or depreciation claimed. I did it the same way for the following years until I had the opportunity to claim those losses last year. It was simply a placeholder.

You might want to check that. If you used TTX any year after converting the property to personal use and a SCH E was generated by the program, then "something" was deducted; most likely depreciation. The program will not allow you to have a SCH E if the property was not classified as a rental for at least one full day of the year.

Now there are other forms that allow you to carry forward NOLs for a closed SCH C and other non-passive business types. But I'm not familiar with how that works with a SCH E passive income business. I do believe SCH C NOL carry-forwards are not treated the same as SCH E losses. But don't quote me on that.

Johndwjr
Level 1

Rental converted to primary in 2015 and sold in 2021

Good thought.  I did look back at my old returns and all of them have the property listed on Schedule E with blanks in all fields including depreciation.  I listed it as zero personal days and 365 fair rental days copying what the accountant did in 2016 after it was converted.  I know that's technically not correct but I didn't see where it would make any material difference.

The rest of my forms and worksheets seem to be correct just carrying forward the suspended losses.

When I plugged the numbers in to the "sale of home" section this afternoon I'm getting just about what I expected re the gain.

 

Thanks again for your replies.  Very helpful.

Carl
Level 15

Rental converted to primary in 2015 and sold in 2021

I listed it as zero personal days and 365 fair rental days copying what the accountant did in 2016 after it was converted.

From the IRS point of view on this,  if there was no personal use days, and all 365 days of the year were "fair rental days", that means the property was never classified for personal use of any type, for even one single day of the year. Therefore, there's no way it could have been your primary residence. Then, if you did not take depreciation as required by law, that's another flag for the IRS. These "flags" generally start flapping in the breeze the tax year you report the sale of the property.

Based on the information provided now, you don't just have a problem here. You have a really big problem that's going to be screaming at the IRS for attention - if it hasn't already.

Seek profession help yesterday, if not sooner.

 

AmeliesUncle
Level 12

Rental converted to primary in 2015 and sold in 2021


@Johndwjr wrote:

as a placeholder to carry forward losses/depreciation until I was able to claim them last year.


 

While it is possible it is correct, that statement has me concerned that last year's return may not be correct.  What allowed you to claim the losses last year?  Did you have Passive Income last year that those losses were able to offset?

 

 

Johndwjr
Level 1

Rental converted to primary in 2015 and sold in 2021

Yes.  I actually sold my only other rental in 2020.  I entered all of that information and TurboTax did the calculations and brought forward the combined losses from both properties against the gain from the sale.

 

So as of now I think I only need to recapture depreciation and pay tax on the prorated gain from my personal residence that was sold this year (rented 2013-2015).  

 

Based on a previous reply I also need to find a way to fix my error of telling TurboTax that the personal residence had 365 fair rental days from 2018-2020.  I looked back and my accountant actually listed 365 fair rental days on the 2015, 2016 and 2017 returns.  On those returns there is a federal asset worksheet showing the property as "mass out of service" 07/01/2015 with the correct depreciation to that date.  He knew I had moved back into the house.  I guess if I have to correct this mistake even though it gave me no tax advantage I could amend 2018-2020 and ask the accountant to fix 2015-2017.   

   

AmeliesUncle
Level 12

Rental converted to primary in 2015 and sold in 2021

Okay, based on your last response everything looks good and there is nothing to worry about (no need to amend anything, assuming that the prior returns didn't show any expenses for that rental on Schedule E).

 

Johndwjr
Level 1

Rental converted to primary in 2015 and sold in 2021

Thanks so much for the reply.  I'm comfortable that I haven't done anything on any of my returns to cheat Uncle Sam.

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