Sold investment property after previously owning as primary and not sure how to do this in TT

[rpatton]

I have always done my own taxes with TT and never had any issues.  No surprise 2020 is the exception.  I am attempting to get my taxes done and confused on how to handle the sale of our investment property.  My wife and I had originally bought the home in April 2004 for approx. $165K.  Over the years that we lived there we remodeled every room in the home, including a new kitchen, all new baths, new windows and doors, and a new deck.  In July 2013 we purchased a new home and converted our original home to an investment property.  At the time TT asked us for the value when placed into service and we estimated $200K for the home value and land value of $60K.  While renting it we did have some expenses though out the years that I believe were recording on taxes correctly.  The largest was replacing all siding and gutters and repairing the roof after a storm.  The tenants moved out end of July 2020 and I spent the next month making repairs to the home to prepare it for sale including replacing the entire roof (the repair did not hold up well), new storm door, flooring, paint, etc.  Home was sold Sept for $223K and we provided $4775 in seller contributions and paid seller closing cost of approx $3K (we did not use a realtor).  The replacement roof was $4500 and I spent around another $2000 on other repairs and did all the other work myself (not sure if I can consider any labor expense for myself, another question I only now as I am typing this even thought of).  I have been struggling with this for 2 days trying to figure out how to do this correctly.  From what I have read online, I am under the impression that we would be responsible for taxes on the difference between the sales price and the put in service date plus improvements, closing cost, seller contributions less depreciation taken.  TT is telling me depreciation taken over the lifetime of the rental was $35K.  So I was under the impression that the taxable event would be $223,000 - ($200,000 + $4775 + $3,000 + $4500 + $2000) - $35,000 = $43,725.  But not sure if this is correct or if I need to use the original purchase price or if I need to somehow take into consideration the land value also.  And even if my understanding is correct I am still not sure how to put this into TT.  I have tried doing under the rental property section with no luck so tried doing under other business sales and when I use my figures TT is showing my taxes go WAY up more than expected since I was expecting to pay 15% of the $43,725 figure.  TT is calculating closer to 20% and our combined income is def not above $496K so thinking I am still not doing this correctly.  Need to get this resolved in a hurry since taxes are due in a couple days.  Any help is appreciated!!

[ColeenD3]

There is a lot here to address, so I may leave something out.

1) (not sure if I can consider any labor expense for myself, another question I only now as I am typing this even thought of). No, you can't.

2) At the time of the conversion, the basis for depreciation was the lower of FMV or adjusted basis. I'm not sure what you chose.

3) The basis is determined by original purchase price plus improvements minus depreciation. The FMV does not enter into the equation.

4) Any depreciation is recaptured as ordinary income, not capital gain.

5) As you made each improvement, it should have been depreciated over the years. You got one sale price, that covers the building, land and all improvements.

6) Yes, you must separate the land from the building. Since it is not depreciable, it was separated out when you began entering the rental. If may have increased or decreased in value or stayed the same in relation to the building.

7) Costs of the sale are prorated between land and building. If the land is 10%, then 10% of the closing costs go to land.

[rpatton]

Thanks for your reply.  As a follow up.  I just went into real property data and it is showing total value as $179,500 with land being worth $62,00 of the total.  So 34.5% of the value is apparently in the land.  I sold for $223,000, with $4775.80 in seller help and $3,000 in closing cost.  We also spent $4500 on a new roof and about $2,000 on other repairs to the home prior to sale.  Am I understanding correctly in that the sales price I should be using in TT is $146,065 (65.5% of $223K) less $5,093 (65.5% of the seller help and closing cost), less $6500 for the new roof and other improvements (since they were not part of the land)?  Bringing my total adjusted sales price to $134,472?  

As for the value when put into service, how do I find out in TT if I used the cost basis or the FMV.  TT is showing put into service 7/15/2013, cost $200,000, land $62,000, business 100%, prior depreciation $31,483.  This makes me think TT defaulted to the FMV, as we originally bought it for $165K and I am sure the percentage split then was likely around the same so 65.5% of the $165K would have been for the home with the remaining being land.  That would have put the starting home value at $108K and even having remodeled every room, I did most work myself so I don't think we spent $100K in total on improvements to bring the total to $200K.  So perhaps this was a mistake from the beginning but guessing it can not be resolved now and likely doesn't matter other than it allowed for potentially a greater depreciation each year than I should have been taking and will now need to make that up in depreciation recapture taxes.

Again, if I am understanding correctly, you are saying I should use the $108K (65.5% of the original purchase price) as my starting position and add to it the cost of improvements that I have made over the entire 16 years of ownership and 65.5% of the closing cost and seller contributions regardless of the "in service" amount?  And from this figure I will use the $134,472 that I came up with in the first paragraph and will pay taxes on the difference?  If this is the case I may not be in as bad of shape as I expected because I am confident that over 16 years we would certainly have had more than $30K in improvements (most while not being rented) but not sure I have the ability to document all of this since it is over a 16 year period.  If this is correct, it looks like I may have sold for a lose and only then have taxes due on the depreciation recapture?

If this is not correct, do I then use the $134,472 figure less $108,000 resulting in taxable amount of $26,472 plus the $35,000 in depreciation previously taken resulting in $61,472 in taxable gains?

Once again, I appreciate your help!

[DianeW777]

Let's start with one question at a time.

1. Am I understanding correctly in that the sales price I should be using in TT is $146,065 (65.5% of $223K) less $5,093 (65.5% of the seller help and closing cost), less $6500 for the new roof and other improvements (since they were not part of the land)?  Bringing my total adjusted sales price to $134,472?  
   • Answer: You can do that if there is no Form 1099-S, or you can use the improvements at 100% and sales expenses of 65%% as sales expenses and leave the selling price in tact at the 65.5%.  If you have Form 1099-S you will want to keep the sales proceeds the same between the building and land to match the reporting form.
2. So perhaps this was a mistake from the beginning but guessing it can not be resolved now and likely doesn't matter other than it allowed for potentially a greater depreciation each year than I should have been taking and will now need to make that up in depreciation recapture taxes.​​​​​​​
   • Answer: You are correct on the action to take, however it would seem with all of your improvements over the time you owned it until it was rented you likely did add those improvements cost even if you did do the work.  If you originally paid $165,000 and then converted it to a rental you aren't talking about $100,000, it's more like $35,000 (+/-). Unless you think I am missing something.  ($165,000 + $35,000 = $200,000) 
3. I should use the $108K (65.5% of the original purchase price) as my starting position and add to it the cost of improvements that I have made over the entire 16 years of ownership and 65.5% of the closing cost and seller contributions regardless of the "in service" amount?
   • Answer: It appears it is one in the same figure. You should complete the sale with the information you have recorded in your tax return because it appears that your rental cost basis is actually what you did use when you converted it to a rental property as opposed to fair market value (FMV).  

​​​​​​TurboTax will use the accumulated depreciation to determine the reportable gain and recapture.  You should enter your sales proceeds, sales expense for both building and land separately, then follow the instructions above for the sales expenses and any improvements completed after your began renting the property and only if they were not entered as capital improvements for depreciation in an earlier year.

Please update if you have more questions.