Sale of a rental property at a profit that used to be a primary residence

[mattf787]

My wife and I bought a house in December 2015 for $415,000. We converted it to a rental property on April 1, 2019 and sold it for $650,000 in May 2021. We meet the ownership and residency requirements to take the exemption on the capital gains, but I can't figure out how to make TurboTax ignore the gain on the sale. I would greatly appreciate any advice. 

Thanks!

[ZoltanB45]

I would record the sale twice. Turbo Tax will be asking about the rental activity and you will have to say that you sold the property. Enter the sale price as the beginning basis when you began renting it. That way you are still have a gain equal to the accumulated depreciation.

Then record the sale of home where you would qualify for the section 121 exclusion.

[Carl]

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  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" 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 if it's zero. Then you MUST work through the "Sale of Property/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 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" 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.

[mattf787]

Thanks for the reply. When entering the cost basis, can I include the costs associated with the sale as well as the costs associated with refinancing the property while it was a rental? If I do that, this is what I end up with:

Date Acquired    12/23/2015

Date Sold             05/05/2021

Gross Sales Price     656,130

Cost Basis                 694,470 = 656,130 + 33,724 (Cost of Sale) + 4,616 (Refinance Cost in early 2021)

Depreciation Taken  29,194 (includes depreciation from 2019, 2020, and included already on the 2021 return)

Loss                              -9,146

Thanks in advance for your expertise. 

Matt

[Carl]

can I include the costs associated with the sale as well as the costs associated with refinancing

- Cost associated with acquisition of the property are added to the cost basis of the property, which is capitalized and depreciated over time. Examples would include transfer fees (sometimes called a transfer tax) to remove the seller's name from the deed and replace it with the buyer's name. On a refinance, you will not have any of these costs since the property was acquired upon the initial purchase.

- Cost associated with acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan. Examples would include loan application fees and survey fees if a survey was required as a condition of loan approval.   If at the time of sale there is still some of this costs left to be deducted, then that remaining costs is fully deductible in the year of the sale.

[tatou1]

Referring to the last paragraph, do you add those costs to the cost basis or elsewhere and how? I am also getting conflicting answers regarding if I should enter the sales of my rental under the business section or the Rental and Royalties one. I lived on my rental for the first 10 years after its acquisition, then rented it out for 20 years. The last tenant left in July 2020 and the property stayed  vacant until I sold it in January 2021. My expenses were reported in my 2020 tax return. I have my depreciation and Amortization report for tax year 2020. I've noticed that only 2 assets were on the asset description: the structure and a carpet. I had other assets like some Windows covers(blind) and a refrigerator that was fully depreciated during the first 5 years of the rental. I wonder why they are not listed since the carpet is already fully depreciated as well. Is it because it is a part of the place and cannot be removed until replacement?  The asset entry worksheet shows the townhouse price of 55k. The acquisition purchase was 53k. I added a Sunroom that cost 2k 3 months after moving in. I wonder If I should change the purchase price to reflect the true contract price and enter the 2k somewhere else as improvement. (Note that this money is already part of the depreciation basis) or leave it the way it is and explain the situation to the IRS if asked. At any rate, it would be added to the depreciation basis anyway. There are other parts of entering the sales of this rental that are very confusing to me like allocating a percentage to figure  out my profit on the sale. Your help would be very much appreciated. thanks in advance.

[Carl]

I am also getting conflicting answers

That's because so far, you have 4 different threads you started in this public user-to-user forum on this specific topic. There are multiple ways to do things in TurboTax. So pick one thread and one way, and stick with it, start to finish.

When entering the cost basis, can I include the costs associated with the sale as well as the costs associated with refinancing the property while it was a rental?

If you're using the guidance I provided above, the program already has your cost basis, and you don't add anything to anything. The program specifically and explicitly asks for sales expenses on  each individual asset as you report it's sale and the program will do the math for you, including the required depreciation recapture.

[tatou1]

Thank you for answering my question. 

If I understand well. On tell us about this rental, I have to enter the amount showed on the asset life History. In my case is 55k land and building, then the land value in the next box. I am not too familiar with this section of TT. To my understanding cost is purchase price plus fees related to the purchase and improvement. I did not add the fees related to the purchase when I first started on TT 30 years ago.I  just added the cost of the sunroom. 

[Beezus]

Please give us an update if you are able to successfully complete this in a way you feel like is correct. I am in the same situation (almost exactly) and I have been struggling to find answers/help. I paid for the turbo tax support and they were not able to help. It doesnt seem like it should be a very challenging tax situation but I am not able to get the situation into turbo tax with accurate answers...or even inaccurate answers haha. 

[AmyC]

For a personal residence converted to a rental and later sold, please see another post of mine here for pictures and steps.

@Beezus

[VinceThai]

Where do you do this in Turbotax ?  In my situation, i purchased back in 1996, rented from 1999 to 2020. Moved back and sold it in Mar 2023.  Base on the 2/5 year rule, i qualified for the tax exemption.   Given i moved back in, my prior taxes (2021, 2022) does not have the property in it any longer.  Therefore, how do i make the property appear again and select sold to complete the form in Turbotax?  

[AmyC]

You don't enter in the rental section. You have to refigure your basis for main home sold. You have 21 years of depreciation to account for in the sale. You are not allowed to include gain from depreciation taken. You must reduce your basis in the house by the amount of depreciation taken. On the flip side, any passive losses that were not allowed can be added back in. If your income is over $150,000, you could not claim losses for those years.

Follow these steps:

1. Determine depreciation taken and passive losses unallowed

• Go back to your 2020 return to see how much depreciation you took over the years. Write that down.
• On your 2020 return, look for a passive loss carryover. Hopefully you have been tracking it through the years.
• Go back through  all tax returns and look for the passive losses if you didn't track them.
• If you were subject to AMT, you will need to determine AMT depreciation as well. 

2. Determine your original basis

Go back to your 1999 return and see how much you claimed for house value to depreciate vs land value. Did you use lower of cost basis (purchase plus improvements) or FMV? If you used FMV since it was lower, restore your original basis instead of using the reduced numbers. 

3. Determine allowable closing costs from the sale, property tax, commissions, etc.

4. Determine new basis for house

Take original basis + unallowed losses. 

The depreciation will be a separate input in the program

The closing costs allowed will go into the program as selling expenses and is defined in the program.

5. Input as sale of main home since it wasn't rented last year.

1. Federal income
2. Sale of Home
3. Start
4. Main home
5. Yes
6. Address
7. Continue
8. 1099S, select yes or no
9. Enter date sold
10. Selling price
11. Sales expenses
12. Continue
13. Date bought
14. Adjusted basis - your home minus depreciation taken
15. Did you live in home at least 2 years
16. Select yes or no
17. Other than primary home
18. Yes
19. Days used for other purposes
20. Sell another home within 2 years of date sold?
21. Yes or No
22. Depreciation after 1997
23. Yes
24. Enter depreciation allowed, if you never had AMT, use the same number for AMT depreciation
25. Continue

Remember to keep all records of a house rental from purchase to sale plus 3 years.

@VinceThai 

[amehta8083]

I am still confused, I have a situation where I owned the house as primary residence from Dec 2016 to July 2022 and then rented that out from Oct 2022 till date. I am planning to sell the house, Where would i enter the information ? Should i enter the same in rental section or enter it as a sale home and then main home as i still meet 2 out of 5 years rule till July 2025. 

Appreciate if you can help as i am still confused whether i should enter sale details (Sale and Purchase Price as well as how many years i stayed there) in rental income section (Not sure if it even has those details available on Turbo Tax online software) or enter it as Sale Main Home ? Although my current main home is not the one i am selling. 

[Carl]

Assuming the house will still be classified as a rental when you sell it, you report the sale in the Rental & Royalty (SCH E) section of the program.

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  2023". Select it. After you select the "I sold or otherwise disposed of this property in 2023" 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 if it's zero. Then you MUST work through the "Sale of Property/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 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2023" 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.