Rental property sold at a loss but Turbo Tax says I have a gain

[Taxing1111]

Hi there - I'm running into issues when reporting the sale of my rental property. Turbo Tax indicates I have a gain of $151,877 on the sale (and owe $30k+ in taxes) where I believe I should actually have a loss here. 

The basis was re-set in 2018 when my husband passed, to the FMV of $403,500 broken out as follows:

Asset: $259,047

Land: $144,453

Prior Depreciation: $24,935

We sold in 2023 for $375,000 with $16,876 in expenses, broken out as follows:

Asset Sales Price: $240,750

Asset Sales Expense: $10,834

Land Sales Price: $134,250

Land Sales Expenses: $6,042

I dont understand why Turbo Tax is calculating such a high gain here. Could there be an error in the system or am I missing something? Can anyone give me some guidance on how to proceed?

Thanks in advance!

[KrisD15]

To clarify, you must also take into account any depreciation take from 2018 until you sold. 

Are you entering 259,047 for your basis in the building and also 144,453 as your basis for the land?

Are you reporting the sale of BOTH assets, the building AND land.

Did you report the disposition of any other assets? 

[Taxing1111]

Thank you for the reply @KrisD15 -

Yes, I am entering both those amounts for the basis of the building and land respectively. And yes, I am entering the sale of both the building and land.

No, there is no other disposition of any other assets.

Many thanks - 

[KrisD15]

Since you have a basis of 259,047 for the building and sold for 240,750 with 10,834 selling expense, you would have a 7,463 loss. 

The land had a basis of 144,453 and sold for 134,250 less 6,020 selling expenses which would generate a 4,183 loss. 

So you start with a 11,646 loss.

HOWEVER when you sell rental property, you need to  "Recapture Depreciation". 

Depreciation works great when the assets wears out, but that doesn't happen with real estate.

You had 24,935 depreciation taken through 2017 and you don't list the depreciation from then until you sold, but I estimate it was around 56,500 based on 259,047 depreciation value. So the depreciation recapture would be around 81,500. 

Needing to recapture 81,500 but having a loss of 11,646 leaves around 80,000 to claim as income. 

This is still way off from your result, but almost half, so I am wondering, did you enter the sale twice? Once in the Rental Sections and a second time in the "Sale of Business Asset" section? 

[Taxing1111]

hi there @KrisD15 , thank you for your help. 

So the 24,935 depreciation amount is actually the amount from the time of new basis until it was sold. I don't think there was any deprecation left prior to that we had owned it for almost 30 years at that point. If I got that right. 

I only entered the sale once in the Rental section, but it looks like it also showing up in the Sale of Business Property area. When I go there, it's clicked on "Nonrecaptured section 1231 losses" and when I try to unclick it and continue it continues to be there when I go back, and also shows on the summary income and expense page.  There was a loss in previous tax years that I can technically apply to this but I just feel the calculation is wrong to begin with and there shouldn't be this large of a gain, if any. 

[AmyC]

For you to have a reset, your husband must have owned the property solely and you inherited it. Otherwise, you owned a building that for your half was fully depreciated and only his half that you inherited had a stepped up basis. All of the prior depreciation should have been removed from the basis of the house when you entered it as a rental property. 

The IRS requires you to deduct all allowable depreciation from the basis when you sell. If you have owned the property very long, the depreciation will wipe out the house and leave just the land. You may have passive losses that were disallowed over the years due to income that needs to be added back in. You need to go through all the years and see what basis was used when, depreciation taken, passive losses not allowed and determine what your real basis was in 2018 then move forward.

[Taxing1111]

oh man - I dont even know if I can find tax documents back that far. Do you mean as far back as 30 years ago when we originally bought it? 

Also, will I need to refile or report that I used the wrong basis in years since 2018? or can I just update for 2023 and move forward?

Sounds like I have my work cut out for me. Is this something that Turbo Tax can help with or do I need to find a separate accountant?

Thanks

[Taxing1111]

@AmyC 

oh man - I dont even know if I can find tax documents back that far. Do you mean as far back as 30 years ago when we originally bought it? 

Also, will I need to refile or report that I used the wrong basis in years since 2018? or can I just update for 2023 and move forward?

Sounds like I have my work cut out for me. Is this something that Turbo Tax can help with or do I need to find a separate accountant?

Thanks

[AmyC]

1. Yes. You are required to keep the taxes on rental property from time purchased until sold plus 3 years.  

2. Maybe, let's see where things are after a little more digging. You must have had some reason for saying it was all fresh in 2018. Let's work with what you have and know. Did you own the property jointly or was it all in spouse's name? Are you in a community property state? 

Was it always a rental? How many years was it rented - approximately? You said you think it was nearly depreciated - good knowledge.

3. 2023 should be filed correctly and move forward

4. We are glad to help. We also have live service and experts to do your taxes for you but this will involve you doing a little thinking and digging no matter what direction you go.

[Rick19744]

A couple of comments:

• Was there an estate return prepared when your husband passed?  Or how are you arriving at what you are calling "reset"?
• Section 1250 will only apply if you have a gain, and based on your current facts, that is not the case; at least based the the actual figures you indicate in your post.
• So at the moment we don't have sufficient information to help, but if you input the details into TT based on what you are saying, the current result does not make sense.  Go back through and revisit this as you would be surprised at the number of users that find the error when going back again and looking at ALL the questions and input. 

[Taxing1111]

Great - I appreciate your help @AmyC 

1. Okay thanks I will make sure to keep the tax returns now that I know. I thought it was only for 7 years. I hopefully have the older ones somewhere on an old computer.

2. Thank you - Yes, we are communal property state here in California. We jointly owed it, actually it was in our family trust name that was in both of our names. It was always a rental, and we bought in 1991 I think but I would have to investigate an exact date. In 2018 when he passed away I was advised to do a step-up in basis to the current value, which we worked with local realtors on. My understanding was that the new stepped-up basis basically started over on the asset and I could remove the other items that had already depreciated. There was however some depreciation on the asset in the prior year 2017 as I can see from the tax return there was depreciation expense of $761, so the asset was not yet 100% depreciated, and assuming then under the 27.5 year life. 

3 and 4. Okay great to know that, thank you