Sale of Rental in 2020.

[Billtm]

Oh wow, here I am in 2021, working out how to deal with rental sale taxes and reading a TON of posts. Many of them answered by Carl which gives me a great sense of trust in him "knowing his stuff".   So now, in the admitting defeat column, ME! Help! I have practically the same story as @cutegoat but after reading so many other posts I think I have confused the (beep) out of myself.   

Using TTax for years to maintain and report taxes for rental.  Had house rented since Jan 2012 and renters moved out Nov 30, 2019 no renters for the remainder of that year.  I took advice and on 2020 taxes just claimed rental for the entire 2019 tax year, EASY!  No renters in 2020 at all, did 23K worth of repairs in 2020, and after repairs put the house on the market in March 2020 with a final sale in May 2020. I have input info in diff ways and currently have house under "Sale of Business property", then I read Cutegoats post. 

?? I have read so many posts about sale of the property. Do this under the rental section or Under the "Sale of Business Property section? I know I gotta stop depreciation for recapture but would that be Jan 1 2020 as it it was decided not to rent during repairs and then sell afterwards?  This means I convert to personal use but zero days use correct?  

My apologies for what will probably seem like a wash, rinse, repeat, post like others but for some reason my brain just can't lock on to exactly what needs to be done-the right way. Help!  Bill Mc

[ColeenD3]

You actually seems to have a handle on it. Since it was not rented in 2020, you will have to enter it in Sales of Business Property.  No renters in 2020 at all

You will add improvements to the basis of the property. did 23K worth of repairs in 2020, and after repairs put the house on the market in March 2020 with a final sale in May 2020

Depreciation stops 12/31/19. I know I gotta stop depreciation for recapture but would that be Jan 1 2020. 

Correct. as it it was decided not to rent during repairs and then sell afterwards? 

No, you did not convert to personal use. You just stopped renting it. You will not enter anything in the rental section for 2020. Make sure that you have your depreciation worksheets because Schedule E will be deleted. This means I convert to personal use but zero days use correct?  

[Carl]

You will not enter anything in the rental section for 2020

That's the only comment that "MIGHT" be wrong. Here's the deal.

If you converted the property to personal use on your 2019 return, then the above comment is correct and you can just delete the SCH E entirely from your 2020 tax return.

If you did "NOT" convert the property to personal use on your 2019 tax return, then you should "NOT" delete the SCH E from your 2020 tax return. You will need to work through the property *AND* *each* *individual* *asset* in the assets/depreciation section, to convert the property to personal use on 1/1/2020.

- Work through the property profile and one of the screens has a selection on it for "I converted this property to personal use in 2020". Select that option.

Then, because of a "quirk" in the programming, you need to work through the rental income section and enter the digit ZERO for rental income. I don't know why, but for some, if you just leave it blank, the program will "complain" when you go to e-file, and won't let you e-file until you enter an amount for rental income. Even if that amount entered is the digit ZERO, then the program won't complain.

Next, you will work through 'each" "individual" "asset" in the assets/depreication section, one at a time. For each asset, one screen will have an option for "I stopped using this asset in 2020". You "MUST" click YES on that screen. If you click NO, then you will be "FORCED" to enter sales information. You are not reporting this sale in the SCH E section. You'll be reporting it in the "sale of business property" section so that you can include the cost of your property improvements in your cost basis.

Now, after you have finished working through the rental property in it's entirety, you need to work through all of the assets in the assets/depreciation section again, for the sole purpose of gathering data that you will "NEED" when you report the sale in the "Sale of Business Property" section.

- You will need the total amount of depreciation taken on all assets. To get that total, you have to add up the prior year's depreciation and the current year's depreciation on all assets. That total will be the total amount of depreciation you have taken on the property since you owned it. You "NEED" that figure when you report the sale.

Next, you will need a printout of the IRS Form 8582 from your 2019 tax return. This form will show you all of your carry forward losses that were suspended. Those losses are "released" in the tax year you sell the property, and you can now claim/deduct all of those suspended losses on the 2020 tax return, up to a point - depending on your AGI for 2020 as well as the total amount of losses that were suspended.

If there is no IRS Form 8582 in your 2019 tax return, then you have no suspended losses to claim.

[Billtm]

@Carl  Thank you soo very much.   I read the forums here last year and and took the advice not to convert my property to personal use last year. That's why we decided to at least try to rent in the remaining month of 2019.  Funny how all this works out.  I just had this feeling scratching at my brain the deleting the SCH E would hurt somehow.  I took the leap and restarted my return from scratch along with your explanations below which seemed to make a difference.  I took the advice step-by-step and after entering the sale of a business property it all just clicked. There were TWO pieces of advice you gave here that saved my tail end. Getting the depreciation amount from the rental and the form 8582 for carry forward losses. THAT was the key I could not find. For many years I have read and read how those carry forward losses can help but just couldn't figure it out.  With the final details for costs of sale (almost forgot to add the realtor commissions paid!) and the carry forward stuff it made all the difference. I can't thank you enough and can now get some much needed sleep. Thank you again. 

[Billtm]

@ColeenD3  Thank you VERY much for the help and info!  Since I did not convert the property to personal use in 2019 and it looks like I was able to make my life easier this tax year.  It was a conscious decision and looks to be a good one. Between you and Carl I took the step and restarted my taxes, learned a few new things, and feel MUCH better about my filing this year.  Again thank you for the help !

[khwilliamson]

I've read a bunch of threads and don't see any that apply to what I would think is the most common situation, which is that the final tenants move out and the property is then sold, all in the same tax year.

In my case, the tenants moved out on 7/31/2021, and we listed the house for sale within the week, hoping for a bidding war.  That didn't happen and the sale didn't close until almost 4 months later.  In the interim I added a $1.3K radon mitigation system, made a bunch of repairs, and had a casualty loss of  around $20K.

I think what should happen is that I convert it to personal use as of 8/1/21, and then have to enter the sale as business property, which means I have to manually enter each asset in that section; something that TurboTax could have done automatically for me if it were properly programmed.  (I'm using 2021 Premier.)  I believe I don't have to enter anything into the Business Income and Expense section, as there was no income, and all the expenses are carrying costs that are accounted for in the cost of sale item.  But I have no idea what to do about the casualty loss.

I suspect that an alternative would be to not convert things to personal use, and continue with the 1/3 year depreciation until the sale closing.  I don't know if that would be proper or not.  One of the answers here advocated doing that, when the conversion was quite late in  the year, and the sale was in the next year.

And then the casualty loss would be a rental expense.  I believe I subtract that loss from the basis too?

And a somewhat unrelated question is the cost of land.  I bought the house in 1985, lived there for 9 years, and converted it to a rental in 1994.  The cost of land when I bought it was considered to be about 23% of the total transaction.  I look at the 2021 property tax notice, and the cost of land is nearly 50% of the assessed value.  From other threads, it seems like I could arbitrarily say it was 23% upon sale; other threads say use the assessor's valuation.  This makes about a $50K difference in taxes.

[ColeenD3]

You don't have to convert it to personal use. Enter the sale in the Rental section since you had tenants in 2021. None of the expenses you had after you stopped having it available to rent are deductible, with the exception of mortgage interest and the property tax for that time period on Schedule A. Major improvements are added to the basis.

As far as the land goes, you do not manipulate the land price to avoid taxes. If the assessed value of the land is 50%, then it is 50%. Often, this information is not available to sellers and they must calculate the best they can. You have the information.