Sale of rental property

[gqxztv389]

Hello. I sold rental property last year and am somewhat confused about how to report it and the turbo tax program seems vague. In 2003 I purchased acreage with a small home for $135,000. In 2007 I finished building a larger home there that cost $300,000 and rented it and at times the original house until 2020. During that period I also refinanced the property to pull equity out to finish the new house. I depreciated it for only 5 years until 2012. I sold the property in January 2022. During 2021 I spent about $40,000 on repairs and improvements, and did not report those on 2021 taxes thinking that would be a write off for when the place sold. Should I file an amended return for 2021 for the improvements and repairs and will they carry forward for 2022? Also what is my cost basis? When escrow closed, the loan payoff amount was about $140,000. Is my cost basis that plus the construction costs of the new house? Also I had selling costs paid out of escrow such as property taxes, a termite report, title agency fees, septic inspection and other inspections and repairs, as well as the sales commission. Are all of these deductible and how do I report them? Is there a better worksheet available for all of this? Thank you.

[DavidD66]

Let's start with your the mortgage loan, it has no bearing on the gain or loss on the sale of your property.  You can ignore it for purposes of determining your cost basis and proceeds.  Your cost basis is your original purchase price plus the cost of the "larger home", less the depreciation (let's say $80,000 for discussion purposes), plus the costs of your improvements prior to selling.  You cost basis would be 435,000 - 80,000 + 40,000 = 395,000.  Lets say you sold the property for $750,000, your gain would be $355,000.  That gain would be comprised of  long term capital gain of $275,000 and depreciation recapture of $80,000, which is taxed as ordinary income.  You don't need to file an amended return for 2021. I would report it as an asset sale and allocate a portion of the sales proceeds to it that results on no gain or loss.  You will also need to allocate your sales proceeds between the structures (houses) and the land.   How you handle the transactions in TurboTax will depend on if the rental was reported using TurboTax and has rolled forward.  If not you will need your depreciation reports from the year you convert the property to personal use, or you can manually calculate your depreciation information.   Finally, you selling costs (sales commission, inspections, termite fee, etc.) are a reduction in the proceeds.  The property taxes paid out of escrow or at closing are not.  They are potentially deductible as an itemized deduction.   

[Carl]

You have numerous properties you talk about in your post. The sale of an individual peice of real estate stands on it's own. If the last occupant the vacate the property prior to the sale was a paying tenant, the below guidance is provided for how to report the sale. The program (not you) will take care of all depreciation recapture and PAL carry over losses if those losses are applicable to the property sold.

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.