Sale of rental property considered primary residence getting hit with Capital Gain

[nando12]

I purchase my primary residence for $295000 and lived in it just under 4 years. At that point I converted it to a rental property with a FMV of $239000 at that point, basing my yearly depreciation.  Said property was sold last year at a purchase price of $339000.  As i understand from the tax code, you are exempt of paying taxes on the gain if the gain is less than $500000 for married filing jointly, but I would be responsible for the depreciation recapture.  The trouble im having is that when I complete the interviews, Turbo Tax is generating a capital gain on the sale.  

I have been reading  https://ttlc.intuit.com/questions/2936029 but this example the property sold for less than the original purchase price which is not my case.

Any help would be appreciated.

[Carl]

Basically, report the sale per the below, in the Rentals & Royalty Income (SCH E) section of the program. Also, the fact you lived in it for 4 years doesn't matter. You must have lived in the property for at least 24 months (730 days) of the last 60 months (1826 days) you owned it, counting backwards from the closing date on the closing statement you received when you sold the property. Note that the 24 months do not have to be consecutive either.

So for example, if you sold the property on July 1 2017, that would mean you had to have lived in the property as your primary residence from July 1, 2012 to June 30 2014. With my dates, if you moved out on June 29 2014, then you do not qualify for the capital gains exclusion.

Assuming you do in fact qualify for the exclusion, I would not expect the difference between your purchase price and FMV upon conversion to make any difference, and for you to still be well under the $500K threshold for the capital gains exclusion.

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 ahve a selection on it for "I sold or otherwise disposed of this property in  2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" 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 it it's zero. Then you MUST work through the "Sale of Assets/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. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically when working through an asset you select the option for "I stopped using this asset in 2017" 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.

[kkpsk]

Hello Carl, I saw something very interesting in your answer which might apply to me. Here is my situation.

    I am a military service member and purchase a house in Colorado Springs, Colorado in July 2014. But I lived there only until the end of October in 2015 and did not live there for 2 years out of 5 to meet the residency requirements due to my military Permanent change of Station to South Korea. So, I rented out that house started from 12 November 2015 until now. I now am considering selling that house to pay off my credit card debts and the equity loan I took out from that house. The gain would be approximately $80,000 to $90,000. I read the IRS pub 523 and it said that I could be eligible for the partial exclusion because of job related reason move. I would like to make a decision whether I should sell it or not by that capital gain tax. If I have to pay capital gain tax, I might only be pay off my equity and would like to keep it until I pay off my equity loan. Thanks in advance.

[Critter]

Read pub 3 starting on page 15 to see if you qualify for the extended exclusion period for military members : 

https://www.irs.gov/pub/irs-prior/p3--2018.pdf

[kkpsk]

Hello Critter, I have read the link you mention. But I am still a little bit confused. The IRS publication 3 said that "You may be able to exclude your gain from the sale of a
home that you have used as a rental property or for business. However, you must meet the ownership and use
tests discussed in Pub. 523.". 

Does that mean no matter what I must meet 2 out of 5 ownership and residence? Or according to the Pub 523 Eligibility test step 5, 

"There are some exceptions to the Eligibility Test. If any of
the following situations apply to you, read on to see if they
may affect your qualification. If none of these situations
apply, skip to Step 6."

According to that, I am qualify for the exception to the eligibility test. 

            Thank you so much for your help. I do not really want to mess it up next year when it times to file my tax return. 

Respectfully,

[Carl]

If you have entered a military W-2 in your return that was issued to you by DFAS (and if your active duty, I know you have) just work it through the program per the below guidance and you'll be fine with a partial exclusion ***IF*** you pay attention to detail and the small print.

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 ahve a selection on it for "I sold or otherwise disposed of this property in  2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" 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 it it's zero. Then you MUST work through the "Sale of Assets/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. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically when working through an asset you select the option for "I stopped using this asset in 2017" 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.

[Flaka700]

We are in a similar situation. We bought our house in Colorado in June of 2013 for $192,000 and started renting it March of 2015 due to PCS orders. My husband has since retired from the army and we are about to sell the house for $275,000. We just bought our new home (primary residence) in Illinois. We are wondering if we will have to pay taxes on the sale of the rental home in Colorado.