Rental Income was Zero because property was sold

[NeedHelp777]

My rental property was vacant thru May 1, 2020 so I didn't have any rental income.

TurboTax is giving me an error because it doesn't accept zero as an income amount, so what is the solution.

I evicted a bad renter in mid 2019 put tens of thousands of dollars into fixing it and then it took almost a year to sell.  during this time I had utility, maintenance, etc. costs and took three trips to check on it and maintain the property.

I used the Income / Expense section which kept deleting the rental due to the zero income but finally got it to work and the program transferred the information the the Sale of Business Property section.  But it fails a check  on line 4 (Royalty) of the Income section of Schedule E. 

Is this a bug in the software or is the zero income bump the rental into another category while I was trying to sell it?

thanks

[Carl]

Where in the program did you report the sale?

Typically, if the property was occupied by a renter for even one day in the same tax year sold, it's reported in the SCH E section. Otherwise, it's reported in the Sale of Business Property section.

Also, did you at least "attempt" to rent it in 2020?

[NeedHelp777]

Thank you for the response.

I input it in the Income and Royalty section and Turbotax transferred it to the Sale Business Property section of the Business Income and Expense category.

I had a hard time with the rental because Turbotax kept deleting it because the income was zero.  after reloading the tax file several times I avoided the income line and input the information myself and it seemed to work and transferred the information to the last section (Sale of Business Property) for me.

My main intent was to sell but it was taking a long time to sell so I started entertaining rental offers in the event of it not selling.  It sold the last week of the Real Estate Salesman's contract while I was making arrangements to accept a renter's offer. 

[Carl]

First, be aware that there is an ongoing issue with the Assets/depreciation section of the program, but only if you're using the online version.  According to my screen, you are using the CD/Desktop version that you installed on your windows or mac computer.

I had a hard time with the rental because Turbotax kept deleting it because the income was zero.

That's not why the program kept deleting it. It deleted it because you selected the checkbox that reads "I did not rent or attempt to rent this property in 2020". Since you did at least "attempt" to rent it in 2020, do not check that box.

Then  you can report the sale in the SCH E section of the program. Take note that even though you had no rental income in 2020, you *MUST* enter a digit in the income, even if that digit is ZERO.

Meanwhile, if you had no rental expenses in 2020, you don't even have to work through that section at all. More than likely you still had to make mortgage payments for 4-5 months, so you will be working through the expenses section anyway, even if the only thing you enter is the mortgage interest.

Then after finishing the rental income and rental expenses section, you can work through the Sale of Assets/Depreciation section to report the sale. That way, the program will do the required math "for you", in the background. (Mainly dealing with the required depreciation recapture.)

Here's the general guidance. Note that you will "not" indicate you converted the property back to personal use in 2020. If you do, then you "have" to report it in the sale of business property section, which means you have to do all the required math yourself, manually.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[NeedHelp777]

Thank you.

[NeedHelp777]

I need clarification on one thing if I could.

When you said "You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset. "  were you referring to the Sales Information under the Business Income and Expenses category?

This section asks the Asset Sales Price, Asset Sales Expenses, Land Sales Price, and Land Sales Expenses (all Business Portion only).

I ask this because I filled this out and separated the asset and land prices before I read your reply, then I combined them under just the asset sales price as per your instructions, which resulted in $2k higher taxes even though all the totals equaled.  

The instructions say "You must divide, or allocate the sales price and expenses between the land and the asset (improvement) based on their fair market values." then gives the four fields for the items I mention above.

I don't know if I've mistaken this screen for another that you described or if your instructions pertain to these entries.

Thanks again.

[Carl]

Example:

You purchased the property in 2010 for $70K, and allocated $20K to the land. That means the structure was allocated $50K, and that $50K is what is being depreciated over 27.5 years.

In 2013 you put a new roof on the house at $15K. You entered the roof as an asset on the 2013 tax return and began depreciating $15K in 2013, over the next 27.5 years. At this point, your total cost basis in the property is $85K with $20K allocated to the land which is *NOT* depreciated.

You still have $50K allocated to the structure which *is* depreciated, and another $15K to the roof which *is* depreciated.

In 2020 you sell the property for $150K. When you report the sale, you report the sale of each individual asset in the Sale of Assets/Depreciation section of the SCH E section.  If you show a gain on some assets and a loss on other assets, it is my experience that the program sometimes will *NOT* correctly be able to handle this mathimatically, and will *NOT* flag any errrors... even though the SCH D and 4979 are *WRONG*.

So when you report the sale of the property itself, you allocate a portion of your sales price to the land/structure asset, and the remaining portion to the roof asset. Here's the deal.

I sold the property for $150K. Since my cost basis in the roof is $15K I want to allocate "AT LEAST" $15,001 to the sale of the roof. So I"m going to allocate $16K to the sale of the roof, so that I will show a gain on that sale.

Next, the remaining $135K gets allocated to the sale of the land/structure asset. I'll allocate "AT LEAST" $20,001 of that to the sale of the land, so that I show a gain on that sale. So I'm actually going to allocate $25K to the land so I show a $5K gain on the sale of that land.

The remaining $110K gets allocated to the sale of the structure so that I show a gain on that sale also.

Take *special* note that even after the depreciation recapture on the structure and the roof, I *still* show a gain on everything individually. When I add together my sales price of all assets, the total comes to my total sales price. No more. No less.

[NeedHelp777]

OK I believe that I did it correctly then.

I'm also assuming that the Real Estate fee is an expense that I have to allocate to both the Asset and the Land.  So my entries will be:

Asset Sales Price  329,000

Asset Sales Expense 19,740

Land Sales Price 45,000

Land Sales Expense  2,700

Thank you

[Carl]

I'm also assuming that the Real Estate fee is an expense that I have to allocate to both the Asset and the Land

That's a perfectly valid assumption, and is not wrong at all. But keep this in mind.

your sales expenses on an asset actually reduce the taxable portion of your sales price. If the subtraction of those expenses puts the taxable portion of the sales price below the original cost basis of that asset, then you will have a loss on that asset.

Now it's weird, or at least seems that way. But if you want, you can put all of your sales expenses on the structure, if subtracting those expenses from the structure sales price keeps the taxable portion of the gain above your cost basis on that asset to allow for proper figuring of the taxable depreciation recapture. Your sales expenses for all other assets can be zero then.

There is no hard fast rule that you absolutely must allocate your sales price or your sales expenses proportionally across all assets. It's just that TurboTax has a "quirk" where in some cases (not all) it will not have the correct end result if you show a loss on some assets and a gain on others.

So when allocating, there's nothing wrong with showing a $50K gain on the structure, and a $1.00 gain on the land, along with a $50 gain on the roof. Then you show 100% of your sales expenses on the structure. But it is important that if you sold at a gain, you actually show a gain on all assets, regardless of the amount of gain on each individual asset. The bottom line end result will be the same no matter how you allocate, so long as you do it "my way" (for lack of a better phrase. :))