Sale of Rental Property - 2020 Two Questions

[ynotsun31]

Good morning Carl,

Also, I spent quite a bit in getting the house ready to sell, counter tops, appliances, painting, does it make a difference whether I put those expenses under maintenance/repair or improvements toward the asset?

Thanks,

Alex

[Carl]

Also, I spent quite a bit in getting the house ready to sell, counter tops, appliances, painting, does it make a difference whether I put those expenses under maintenance/repair or improvements toward the asset?

Assuming this is/was renter property and you did convert it to personal use after the last renter moved out, yes it does. Anything you declare as an expense does not and can not be added to the cost basis. Generally, expenses incurred after that last renter moved out are flat out not deductible anywhere on the tax return. Anything declared as a property improvement does add to the cost basis of the property and reduces your taxable gain on the sale.

Now painting is not a property improvement, because from the perspective of a licensed property appraiser, painting does not change the value. One color is no more or less value than any other color. However, when you do a property improvement that includes painting, then you include the cost of that painting as a part of the property improvement, and not an expense separate from it.

Basically, everything you listed is a property improvement, possibly with the exception of painting unless said painting was done as "a part of" the property improvement.

[ynotsun31]

My tenant left in September and I sold the house in December.  Would that have converted to "personal " use if I was getting it fixed and updated to sell?  Also the painting had to be done as part of updates and repairs.  So sounds like I should classify as improvement?

[Vanessa A]

Yes, that would have been converted to personal use for the time you were getting it ready to sell since it was no longer being rented or available for renting. 

If the painting was part of the repairs, repairs are not deductible (patching a hole in the wall and painting it.  Improvements such as counter tops or kitchen remodels are added to your cost basis. 

[Carl]

Also the painting had to be done as part of updates and repairs

Either the painting was part of an upgrade, or part of a repair. One or the other.

Upgrades are property improvements that get added to the cost basis.

Repairs are not deductible or added to anything.

So if painting was a part of a repair, it's not deductible anywhere.

If painting was part of an upgrade/property improvement, it gets included in the cost of the property improvement; not an item separate from it. Painting by itself is not a property improvement.

[shirleyhe4461b]

This is one of the most helpful post I was able to find. I too owned a rental property (duplex), lived in one unit and rented out the other since purchasing the property in Jan, 2005.  Then in 2012, the owner occupied unit was also converted to rental and both units remained as rental since then.  In March, 2022 I sold the duplex.   Based on you post, I want to confirm I should do the following for 2022 tax return in order to properly claim capital gain and asset depreciation recapturing tax. Pardon me for the long message, the instruction on this was not intuitive and I think this post will help others as well.

• Under Wages & Income => Rental Properties and Royalties (Sch E) => click on edit next to the property name then the next page shows the rental property info like the rental income, expenses which I already entered.  I should then click on "Add expense or asset" => select "Sold rental property" under Asset then follow the prompt to finish adding "Sold rental property" as an asset.  Adding "Sold rental property" asset will pull all the previous assets I had been depreciating into this "Sold rental property" asset.   I have a list of 12 assets (which are actually just 6 assets, split into upper and lower unit of the duplex reflecting the different dates I started depreciating for each unit based on the dates each unit is used as rental).  In the asset list, two halves of the refinance cost, roof replacements, etc as well the building (minus the land) were all depreciated.
• in your reply you said each asset needs to be properly disposed of.  For the refinance cost which I categorized as a nontangible asset, whatever left over that's not depreciated got transferred to the expense field.  Does this seem right?
• For roof replacement, new garage, other non-building assets, could I just enter $0 as sales price for each half of the assets since the building asset includes the sale prices already?  that's where it confused me.
• How do I deal with two halves of the building (no land) assets?   For the sales price, the Turbotax described it as cash received, the calculation would be price sold minus mortage balance paid off?  To get the sale price for the building portion, I just used the ratio of the building depreciated vs the original purchase price and multiply the (price sold - mortage balance).  Then for the sale price for the land portion, I just subtract the sales building price of the earlier calculation from the sales price (price sold - mortage balance).  Do these calculations seem right?    Do I just split the sales prices at 50/50 and enter into each half of the building asset? 
• How do I add other improvements I didn’t previously depreciate as assets?  I think these were deducted as expenses in the earlier days when I didn’t know what I was doing, like repour the concrete steps ~4000 in front of the duplex, replace the wood deck ~4000.  Also we remodeled the kitchen and bathroom ourselves total of ~$3000 material while we lived in the upper unit and the expenses where not deducted at the time work was done because it was owner occupied and after we moved out not deprecated as assets.

Thank you!

[Carl]

@shirleyhe4461b a few of your assumptions on how to report this appear to be wrong. So that I get you the correct information, (or someone else does if I can't) we need to know how you have been reporting this on the SCH E.

Did you treat the rental using as a physically separate asset, thus reporting it as a single family unit?

Or did you report it as a multi-family unit where you the owner occupies one of the units as your primary residence or other personal use?

Knowing this will help save time so I don't waste time and possibly add confusion by trying to cover both scenarios.

[shirleyhe4461b]

I treated the duplex as a multifamily unit where I owner occupied the upper unit from purchase date of 01/06/2005 to 01/01/2017.  So I only depreciated the lower unit which I rented out from 01/06/2005 to 03/21/2022 the day I sold it,  the depreciation amount was half of the building purchase cost (minus land).  When I moved out on 1/1/2017 and rented out the upper unit, I started to depreciate the other half of the duplex until 03/21/2022 the day I sold the entire duplex.

[Carl]

Since the unit you lived in was not your primary residence for "2 of the last 5 years" you owned it, counting back from the closing date of the sale, you don't qualify for the capital gains tax exclusion. Therefore, I don't see an issue with reporting this sale on SCH E.  That is, provided everything appears under a single column on the SCH E for lines 3 through 22. Is this the case?

If it appears under 2 columns (column A and B) then you can still report the sale in the SCH E section. You'll just have to report it as two sales allocating half to each one.

So here's how to report the sale on SCH E so that depreciation is correctly recaptured and any PAL carry over losses are correctly applied to reduce your tax liability on any gain realized on the sale. A few notes first.

If you sold at a gain (I assume you did), then you must show a gain on each individual asset. Doesn't matter if that gain is $1 on some assets, and $50,000 on other assets. A gain is a gain, is a gain, is a.... you get the point.

While your gain on the sale is taxed at capital gains tax rates, recaptured depreciation is taxed at the "ordinary" tax rate anywhere from 0% to a maximum of 25%.  If you sold at a gain and you show a loss on any assets, the recaptured depreciation on that asset will incorrectly be included in your capital gain and will be incorrectly taxed at the capital gains tax rate. So be aware of that.

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.