Sale of rental property that used to be primary residence

I have a similar situation but can't find any IRS info that supports the "no loss or gain since it sold at less than purchase price but more than what it was appraised at during in-service date".  Can you elaborate on this?

I have the same situation & question.

IRS Treatment is clear - See p. 4 of IRS Publication 544.  

Now, as to how to get TurboTax to report it correctly....

where does p4 of IRS Publication 544 support the "no gain provision?" I have the exact same situation. It would be common sense that any gain relative to FMV at the time of conversion that was less than the purchase price would be excluded, I just don't see where specifically. The only exclusion appears to be if the property was not rented for 2 of the last 5 years.  Any help would be appreciated!

IRS Publication 551, page 10, explains how to calculate the gain/loss.  Nowhere does it say the answer is "no gain"  I don't see that in Pub 544 page 4 either.

Hi guys it's in PUB 544, on page 4.

Gain. If you have a gain on the sale, you generally must recognize the full amount of the gain. You figure the gain by subtracting your "adjusted basis" (price you paid plus improvements) from your amount realized (sale price), as described earlier.

What this means is that you only pay a gain if your sale price is more than the price you paid (not FMV at the time of conversion).

But in order to take an ordinary loss on your return, you may be excluded from doing this if the FMV was less than your adjusted basis at the time of converting your rental.

I hope that helps.

You are correct, there is no gain or loss.  However, TurboTax is not set up very well to report this.

In most cases, the sale of Rental Property is sold in the rental section and you sell the 'asset' of the house.  However, if the property was originally a personal-use property and it converted to a rental property when the Fair Market Value was less then the Cost Basis (usually the purchase price plus cost of improvements before it was a rental), it is reported in the "Sale of Business Property" section.

Go into the "asset" for the property in the Rental section, and indicate that you sold it.  When you get to the screen that asks about "Special Handling", say YES.  Then it will ask you to enter the date of the sale (do NOT enter the sales price).

Now figure out how much depreciation you took on the property, including the current year.  It may be helpful to print out the 'Depreciation and Amortization' worksheet (you will need to pay before you print it).  It is the side-ways worksheet.

Then go to "Sale of Business Property".  If it was sold for less than the 'Fair Market Value when converted to a rental', you would say No, it was not sold at a gain, then on the next screen, yes it was sold at a loss.

However, in this situation there is not a gain or a loss.  To property report this, we sort-of need to 'make up' the "basis".  For your 'basis' you enter the total of (1) Sales Price plus (2) total depreciation plus (3) $1.  Then enter the actual Sales Price and the Depreciation where it asks for them.  That should give you a $1 gain and put it on the proper form (that section won't allow a $0 gain/loss).

EDIT: Edited to add the $1 because the "Sale of Business Property" section will not allow a $0 gain/loss.

Does this also remove other assets (improvements) that were added to the property (such as new carpeting throughout)? Or do I need to file that as a separate item? (It was added several years ago, and has been depreciated a lot.)

Yes, I too wonder how to treat the other assets created (improvements). Do I prorate the sales price? What about the land that was not depreciated?

Does this answer still work?  I see that it is 2 years old and the screens are a bit different. If I follow the above example TurboTax says there is no gain so it removes the entry.  Do I then go back into the asset to sell it instead?

I see this post is 2 years old.  Does this still work for 2017?  When I follow the "makeup basis" I says there is not a gain and TurboTax will delete the record.  Do I then need to go back into the asset and improvements to pay it off again?

I have this exact situation and it seems like there is no way to make TurboTax determine that there is no loss. I basically end up with a huge loss which is incorrect, it should be a loss of $0. I wish there was more help for this, right now in order to make sure this is done correctly it seems like I will have to go to a tax professional and skip using TurboTax this year...

Well, I tried TaxGuyBill's suggestion and I was able to have TurboTax then show $-1 loss on the sale, which is close enough to zero. I guess the question is, when filed, does manipulating the cost basis as suggested satisfy the IRS? My concern is that it looks wrong or "fishy" in the filing...

@TaxGuyBill 

• Shouldn't the basis be original cost + selling expenses? Or is the goal here just to 'somehow' get a 0 value for the sale of the business property? 
• And how does depreciation recapture occur under this scenario? 

I'm in a similar situation where I bought a house and lived in it for awhile, started renting it out when it had gone down in value, then sold it when it had recovered to slightly under what I paid.  Having deducted over 15,000 in depreciation, I was expecting to have to pay ~25% of that back because of recapture.

Am I the only one who would like TT to better handle the Sale of a Rental Property? 

• shouldn't we have been asked for info on our settlement sheet, which could have flowed to deductions and basis adjustment
• there should be just 1 place to deal with sale of a rental property instead of 2
• gain, loss, or no gain/loss could all be sorted with a few simple questions

Edit: I had about 1 minute left to e-file so I did it your way. TT did allow a zero amount:

And it shows up on form 4797:

Hey TaxGuyBill,

In the same boat, on converting primary home to rental, and then selling between (the FMV+improvements) as the basis and (the original purchase price+improvements) as basis. By adjusting the basis to the sales+depreciation will zero the "gain" or "loss". This seems consistent with Publication 544, page 5.

Just wondering has anyone had an issue with this adjustment?

Also, thanks a ton for posting your explanation.

If your property fell between the FMV at the date put into service and your cost plus improvements on that same date, you would zero out the gain and/or loss, however you need to recapture the depreciation. 

Any improvements made after the date placed into service would need to be listed as separate assets. 

For example, if you replaced the roof on the rental, and the cost to replace the roof was 5% of the home's basis, you would need to allocate 5% of the sales price to the roof and claim the gain if any.  

Hi, I am in the same situation.

After filing your tax return, did IRS accept your return? Did you have any issues afterward?

Thanks in advance for your reply.

Best,

Overland

Hello Turbo Tax experts/community,

This post is from 2019 and I am doing 2020 taxes and have the similar situation. How are we to report this using TurboTax 2020? Was TurboTax2020 fixed to capture this scenario as explain in Publication 544 page 4?

Please response as I am waiting for an advice.

Thanks.

For my 2019 Tax return, I could not do it through Turbo Tax, so I found a CPA to do my tax return. Surprisingly, not many CPAs seemed confident enough to handle this situation. So you better hurry to find a confident CPA who knows what to do in this case. Good luck! -Overland

Hello Overland0715,

Thanks for your prompt reply. So how differently did the CPA do this?

Was form 4797 prepared where Part1 line 2:

column d was the gross sales price (as expected)

column e was the total depreciation taken (as expected)

column f was the correct fair market value (and not the misleading value suggested by the original post to make TurboTax work)

column g was zero (eventhough if you do the math as specified in Publication 544 page 4 it was equating to a positive number but zero was used by following Publication 544 page 4 instructions)?

Waiting for your response.

Thanks.

In the Form 4797,

Part I is empty except for "0" in the line items 6 and 7.

Part II is empty except for "0" in the line items 13, 17, and 18b.

Part III, the line item 19 has the address of the property sold with the dates accquired and sold.

there are values filled out in 20~24.

For example,

line 20: $100,000

line 21: $130,000

line 22: $30,000

line 23: $130,000

line 24: $0

I think the line item 22 "Depreciation" allowed or allowable is made up to be the difference between the line 20 and 21 such that the line 24 becomes 0.

Also following line items(26a,c,g, 30, 31, 32) have "0"  

Hope this helped. -Overland

Correction: In the example, the line item 23: $100,000 (= same value of the line 20)

Please see if you dont mind answering the below.

Much appreciated. Thanks.

line 20: $100,000   <-- Is the gross sales prices.

line 21: $130,000   <-- Is the correct cost basis, which is Fair market value (not original purchase price) plus selling expenses. Or was this the amount made up to cause a zero affect (which is what the original post suggests to be done)?

line 22: $30,000     <-- Is the total depreciation taken.

line 23: $100,000   <-- line 21 minus line 22

line 24: $0                <-- line 20 minus line 23

What I was expecting to see in your example was that the sales prices (line 20) was indeed more than the adjusted basis (line 23), which means one made a gain but that gain was not more than from perspective of original purchase price (as a real gain would have been if one had sold at more than thier original purchase price and not more than the fair markert value at time of conversion) and thus it is not a real gain and zero is to be used instead.

Below is the Snapshot from Pub 544, page 4 (2020 version)

Figure the loss you can deduct as follows.
1. Use the lesser of the property's adjusted basis or fair market value at the time of the change.
2.Add to (1) the cost of any improvements and other increases to basis since the change.
3.Subtract from (2) depreciation and any other decreases to basis since the change.
4.Subtract the amount you realized on the sale from the result in (3). If the amount you realized is more than the result in (3), treat this result as zero.The result in (4) is the loss you can deduct.

Figuring a gain uses the highest numbers, the amounts actually paid.

Figuring a loss uses the smallest numbers, the conversion FMV values.

This leaves a range between as no gain or loss.