Sale of rental property that used to be primary residence which results in no gain or no loss

[fallidina]

Hello,

I am trying to figure how to enter my sale of rental property that used to be my primary residence and the sale results in no gain or no loss but TurboTax Premier 2020 shows a gain, which is incorrect.

Facts:

-The townhouse was purchased in 2007 for $378,020. In 2018, converted to rental and at that time I has to use the lesser of original purchase price or Fair Market Value (FMV) as my basis for depreciation. FMV in 2018 was $260,000 (as per City's assessment and Real Estate Market). Thus FMV was choosen.

-In 2020, sold the rental property for $288,888 and has total depreciation on it of $20151. 

-No improvements.

-As I understand, an actual gain for my scenario would have been if I would have sold the rental more than my original purchase price, which I didnt. Thus no gain.

-As I understand, an actual loss for my scenario would have been if I would have sold the rental property less than my Fair Market Value (of 2018), which I didnt. Thus no loss.

But when the sale is reported into TurboTax, it shows a gain and its doing this:

Gross Sales price: 288888.00
Depreciation taken on this property:  20151.00
Cost basis (Fair marker value plus selling expenses): 260000 + 18622.20 = 278622.20
Gain/Loss calculation: Gross sales price + depreciation - cost basis, i.e, 288888.00 + 20151.00 - 278622.20 = 30416.80

This is causing a tax liability for me which it shouldn't. Anyone can assist please?

Thanks.

[Carl]

But when the sale is reported into TurboTax, it shows a gain

That's because you do have a gain in a sense. When you sell the rental property, you are required to recapture all prior depreciation taken and pay taxes on that recaptured depreciation in the year you sell the property. That recaptured depreciation is not exempt from taxation under any scenario, unless you sold the property for less than it's cost basis minus the depreciation.

[fallidina]

Thanks for your insight Carl.

When I say TurboTax shows a gain, its showing the gain I displayed in my original post, that is, 31416.80 which is not my depreciation taken (20151.00). I would have gone with your statement if that was the amount but its not and after doing more research, there is no recapture of depreciation if you have no real gain on the sale of rental property.

So hoping someone chimes in soon to provide further clarity to this matter.

[AmeliesUncle]

You are correct that there is no gain and no loss.

However, TurboTax is NOT set up for this situation, so you may consider going to a tax professional this year.

[fallidina]

Hi AmeliesUncle, thanks for your response.

I am interested in learning how differently a CPA would do this manually if TurboTax is really not set up for this.

I expected TurboTax to be robust!

Would you or any CPA in this community forum be able to shed some light to below question?

There is publication 544, page 4 showing how to calculate this and report a zero in my scenario.

1. Currently, My Form 4797 (as done by TurboTax), part 1 gets populated with line 2 as follows:

2a.  property description

2b. date purchased

2c. date sold

2d. gross sales price - which is more than my FMV but less than my original purchase price - 288,888

2e. total depreciation taken - 20,151

2f.  cost basis which is my FMV plus selling expenses - which is less than my sales price and my original purchase price - 260000 + 18622.20 = 278622.20

g. gain or loss - Math done by software is: line 2d plus line 2e minus line 2f which is resulting into a gain which is correct math but since my sale falls inbetween the range (as discussed reviously), this should not be a gain nor a loss, instead a zero should be put but TurboTax is not doing that (as per Publication 544 pg4) - 288888.00 + 20151.00 - 278622.20 = 30416.80

2.  Is form 4797 correct for this or What form(s) can I manually fill to report this correctly and which part/section/lines in that form need to be populated would be a great help if anyone can share. 

3. Would you say after reading Publication 544 pg 4 that when form 4797 is manually done, part 1, line 2g should be put down as a zero even when the math it asks to be computed results into a positive number?