Sale of Personal converted to Rental Property

[BCMulx]

A question on tax reporting, I'm suspicious of an error in a prior year return due to how TurboTax walked me through the process.  I wanted to see if anyone has run into this before with turbotax, and if there's any CPA out there if they could weigh in...  

I bought a personal home in 2005.   Lived in it for approximately 1.5 - 2 years and then  converted it to a rental late 2006.   Fast forward 12 years later and the property was sold at the beginning of 2018.     The property was used as a rental up until the year it was sold, with tenants moving out approximately 3 months before the sale.  At sale, it had not been my residence for the prior 12 years.

I did have a gain on the sale, and my question is about how to account for that gain.   When I entered into TurboTax, it led me through a pretty detailed process to split out the Business and Personal Portions of both the Sale Price, and Sale Expenses based on number of days personal and number of days business, for 10% personal / 90% business split.  I never thought to question this at the time, I remember it seemed like a real pain in the neck actually.

Sale price was 380K, Sales Expense were 22K.   I believe that I paid the business tax on 90% of the 380K (343K), deducting 90% of the 22K expenses (19K).    I'm now wondering if I should have paid tax on the full 380K, and deducted the full 22K (This one definitely wouldn't work out in my favor, but I have to know...  Not the end of the world, but I'd owe around 6K in tax if it needs to be adjusted)

The relevant information I can find is in Publication 544:

https://www.irs.gov/publications/p544#en_US_2019_publink100072282

Two sections:

Property Used Partly for Business or Rental

and, what I think applies instead:

Property Changed to Business or Rental Use

Has anyone run into this?   Any comment on whether there should / should not be an adjustment for the business / personal split?   Are there other publications or conditions that would make the adjustment correct?

And yes, I am reaching out to a professional as well, but want to see if there's comment from anyone familiar with TurboTax.

[Carl]

What you sold was 100% (one hundred percent) bushiness property and you are taxed on 100% of the gain. Period. From the date you converted it to rental property, that's what it was.... one hundred percent business property.

You incorrectly told the program you had a percentage of personal use, when the fact is, you did not.

The property was 100% personal use ***BEFORE*** you converted it to rental.

The property was 100% business use ***AFTER*** you converted it to rental.

therefore, 100% of the gain is taxable.

There are several issues that contribute to your error in reporting.

 - The program is not very clear in explaining things - usually because they use the *EXACT* IRS wording of an explanation; and that wording itself is commonly vague and misleading in and off itself.

 - Users sometimes don't read the small print that will sometimes provide the clarity needed. (sometimes not)

 - Users tend to "read between the lines" and make assumptions about things that just flat out are not there in black and white.

The only way to correct your error now, is to amend your 2018 tax return. You would need to do this *BEFORE* you even start your 2019 tax return, if you have any carry overs of any type from any transaction that would need to be carried forward to the 2019 program. 

So if you sold your rental at a loss, there is a strong possibility that you may have carry over losses if your loss on the sale exceeded $3000 after deducting the allowed carry over losses.

[BCMulx]

I want to clarify one thing - I spent a LOT of time on this one section.  It wasn't breezed through not looking at the fine print.   And it was initially my thinking that I didn't need to and shouldn't do the adjustment that was eventually made, and it sure as heck wasn't something I came up with on my own.    I feel like TurboTax (incorrectly?) led me into it and wasn't giving me an easy way to go without the adjustment.

Now, of course this is a couple years back, and I can't access the question set anymore to go back and look at it, so I guess it's besides the point.  But partially I'm looking to confirm the answer you gave me (taxed on 100% of the gain?) which was also my suspicion in the original post, but also if anyone else has run into this issue before because I've seen anecdotal reports of problems with the business / rental section elsewhere...

Thanks for the advice.

And yes, if it needs correcting, it's getting corrected.

[AmeliesUncle]

As was pointed out, it seems like you need to amend to correct things, as you need to pay tax on 100% of the gain.

Yes, TurboTax is faulty in this area and many more.  But it is extremely unlikely to ever get fixed.

[Hal_Al]

Here's a third opinion (if you need it): your have to pay capital gain tax on 100% of the gain, including depreciation recapture.  Depreciation recapture is taxed as ordinary income (not capital gains rate), but at not more than 25%.  Depreciation recapture  is identified as Section 1250 gains on line 19 of Schedule D.