Sale of Rental Property in AZ but am a Resident in CA (Asset Wks)

[RichTR1]

I sold a property in AZ and am trying to Figure out the Asset worksheet (Residential)  to give the actual proper gain.

The taxable gain should be the cost basis of the property - depreciation= new cost basis.

Total gain = Sale price - selling costs - new costs basis = taxable gain (including depreciation). 

Long Term Capital Gain = taxable gain - deprecation - passive losses = LTCG which should be taxed at 15%

Depreciation would be taxed at 25% for Fed.

The Asset worksheet is very confusing. Some how the 6.  Percent of business use =42% and I have no idea where that came from. How did Turbo tax arrive at this number? I bought the home as a primary residence 12/30/2009 and has been a rental since 08/01/2010. This 42% makes the Fed tax due as unreasonable. I believe this percentage of business use should be 100% which makes the tax due more reasonable however 100% does not equal the actual gain I calculated in the above .

I am using Turbotax Home & Business.

[ReneV4]

If you moved out of the home and it has been a rental exclusively starting August of 2010, then the business use percentage for the time it was a rental should be 100%.

If TurboTax is showing 42%, it is likely an input error. It may be mistakenly calculating business use for only the current year if you sold it mid-year, so please review your entries in the Assets/Depreciation to ensure the percentage of business use is set to 100%.

Because you bought the home as a primary residence and later converted it to a rental, your starting basis for depreciation on 8/10/2010 was the lesser of its adjusted basis (original cost plus improvements made while you lived there) or it fair market value on the date of conversion. 

To find your adjusted cost basis at the time of sale, take that starting point, add any capital improvements made after it became a rental and subtract all depreciation you took, or were allowed to take, over the years.

To calculate the total gain, subtract the selling costs from the sale price to get your amount realized, then from your amount realized, subtract your adjusted basis.

Your total gain is not taxed at a single rate. Your total gain is split into two categories:

Depreciation Recapture: The portion of your total gain that is equal to the total depreciation you took over the years is taxed as ordinary income, capped at a maximum rate of 25%. 

Long-Term Capital Gain: The remainer of your total gain after subtracting the depreciation recapture is treated as a long-term capital gain, which is generally taxed more favorably (typically 15-20%).

You do not subtract your suspended passive losses from the gain itself. Instead, when you sell your entire interest in a rental activity, your suspended losses are freed up. They will offset your passive income first, such as the sale of this property, then any remaining losses will offset ordinary non-passive income, like W-2 wages or investments.

[RichTR1]

Thank you ReneV4. However I found bugs in Turbo tax which need to be fixed. I did sell the rental in its entirety in Jan 2025. TT was not figuring LTCGs properly even after making it 100% (BTW I have no idea where the 42% came from in TT). After that It was not allowing the Past years Passive losses in the calculation to determine LTCG. I had to manually enter the passive losses (from Prior years) on Schedule E worksheet CarryOvers to 2025 Smart Worksheet Line G ,suspended Loss under, Regular Tax column. This then flowed the correct LTCG calculation through Schedule E-> Form 8582-> Schedule D. This exact flow matters on TT as I had tried adding the Passive losses several places. TT should have asked me for the previous Passive Losses not allowed over the years to fix this.

After fixing this on my Fed return I did my AZ Non Res and CA 540 Resident  returns.  However this is where another bug came up in TT which needs to be fixed immediately.  When entering "Taxes Paid to Another state" in my CA return (from the Sale of my AZ rental) it said "This income is from Arizona  and I could not claim the credit". TT assumed this was from wages and not the proceeds from the sale of the rental I disposed of in AZ. Therefore I had to manually go and add the CA Schedule S by selecting forms then picked Schedule S and input the AZ Rental property Sale income in Column B tnen put the amount of AZ tax in there. However the drop down on Schedule S did not allow AZ to be picked so now I get an error on the CA state return. 

THIS NEEDS FIXING IMMEDIATELY TURBO TAX!