Reporting Sale of Rental Property converted from a primary residence

[thyname11]

I am using TT Premier on Desktop version (Windows computer). I am having an issue with how to report the sale of rental property in 2021. Here are the details:

1. Bought the property as my home in 2006 for $410,450
2. Lived in the property myself (own residence) through 2014
3. Put it for rent in 2014 (I can estimate the fair market value at that time based on county tax as $332,000)
4. Sold in 2021 for $390,000 (minus closing costs of about $22,000)

I think I need to put the cost basis as the fair market value in 2014, the year it was put in service as a rental, and not the original purchase price in 2006 when I bought it for myself. Correct?

But it only let's me put the original purchase price. How do I correct this? I understand I need to put the original purchase date, and the original purchase price, but don't they also need to know the cost basis (fair market value) when it was placed in service as a rental in 2014?

Thanks!

[tagteam]

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@thyname11 wrote:
....don't they also need to know the cost basis (fair market value) when it was placed in service as a rental in 2014?

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No, they do not since that fair market value was only for the purposes of calculating your depreciation deductions.

You need to know your cost basis, the cost of any improvements you might have made, your sales price, your selling expenses, and your accumulated depreciation figure (the total of all of the depreciation deductions you have taken).

Again, your cost basis, for the purpose of the sale, is going to start with what you paid for the property in 2006, not the fair market value in 2014.

[thyname11]

—————Again, your cost basis, for the purpose of the sale, is going to start with what you paid for the property in 2006, not the fair market value in 2014

Are you sure about this? Everything I read on IRS publications points to using the fair market value on 2014 (when it was converted to rental from residence) to use as cost basis. In my scenario. Please note the details on OP for dates and values.

I appreciate you chiming in

[tagteam]

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@thyname11 wrote:

Are you sure about this? 

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Yes. What you are reading must be the basis for depreciation (which is the lesser of your adjusted basis or the fair market value on the date the property is converted to rental use).

For a sale, you would use your original cost basis (adjusted for closing costs when you purchased the property) plus improvements to arrive at the basis for that purpose.

[Note that your basis is going to be effectively reduced by the accumulated depreciation deductions]

[thyname11]

@tagteam 

I really wish that was the case. It’s too good to be true.

Any sources to back this up? Don’t take this the wrong way, but where do you base your reply on? Are you a CPA? If so, I will gladly pay you to do my taxes that way

[tagteam]

See https://www.irs.gov/publications/p544#en_US_2021_publink100072267

See Section 1011: https://www.law.cornell.edu/uscode/text/26/1011

[tagteam]

See https://www.irs.gov/publications/p527#en_US_2020_publink1000219151

For the basis of property changed to rental use.

[thyname11]

I noticed they only talk in that link about changes to basis for depreciation. Maybe I missed something, but for figuring out the cost basis for purposes of sale, this one does not apply:

Figuring the basis.

The basis for depreciation is the lesser of:

• The fair market value of the property on the date you changed it to rental use; or

• Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. 

[tagteam · Accepted solution]

Yes, for the purposes of a sale, you would use your original cost basis (adjusted for improvements and accumulated depreciation).