Sold my rental property

[chingjen]

I sold my rental property at $XX as a whole in 2019 and did NOT break down the sell price into $a for land, siding for $b, building for $c, and ...   However, I have several items in my TurboTax depreciation section: main property including land, sidling improvement, dryer, heater, and … When preparing my tax return for 2019, may I enter the entire sell price of my property in the main property only and zeros for the other items in the depreciation section?  Anyway, I sold my property as a whole. 

[Carl]

When reporting the sale of rental property that has multiple assets listed, the TurboTax program does not always handle reporting of the sale correctly if you show a gain on some assets and a loss on some assets. This is especially true if all assets listed do not have the same exact in service date, and same exact class life of 27.5 years.  It tends to really screw up the SCH D. The issue with that, is that the program will not always flag the error - but that doesn't make it right. If you follow the guidance below, then you won't have this potential issue.

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  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" 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 it it's zero. Then you MUST work through the "Sale of Assets/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. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" 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.

[chingjen]

Thanks very much!  It is extremely helpful!

I have a follow-up question.   I have a gain for the transaction.  How do I allocate the sell price to each asset ?   There are millions of ways for the allocation to show a gain for all the assets.  Does this mean I can have any arbitrary allocation as long as a gain is showed for all the assets.

[Carl]

Does this mean I can have any arbitrary allocation as long as a gain is showed for all the assets.

That is correct. So you don't have to worry about "evenly" allocating the gain across all assets. You can have a $1 gain on one asset, and a $1M gain on another. That's fine. A gain is gain, period.

Just keep in mind that you are allocating across your "depreciated" assets. So your land price will not change since land is not a depreciated asset.

Example:

Purchased property in 2010 for $100,000 as your primary residence. Converted to a rental in 2015. When setting it up in TurboTax back in 2015 you had:

COST: $100,000

COST OF LAND: $30,000

The program "does the math" in the background and depreciates the difference of $70,000 over the next 27.5 years.

In 2016 to put a new roof on at a cost of $20,000. WHen you enter that in TurboTax:

COST: $20,000

COST OF LAND $) (ZERO DOLLARS)

The program depreciates that $20,000 over the next 27.5 years starting on the 2016 "in service" date.

So at this point your total cost basis on the property is $120,000 with $30,000 allocated to the land, and the remaining $90,000 being depreciated. In 2019 you sell the property for $150,000. You can allocate the sales price as follows:

LAND COST: $30,000   LAND SALES PRICE: $40,000 ($10,000 gain on the land.)

STRUCTURE COST: $70,000 STRUCTURE SALES PRICE:$80,000 (gain on the sale of the land will be MORE than $10,000 because the recaptured depreciation on "this specific asset" gets added to that sales price.)

ROOF COST: $20,000 ROOF SALES PRICE: $30,000 (gain on the sale of the roof will be MORE than $10,000 because the recaptured depreciation on "this specific asset" gets added to the sales price.)

TOTALS: Cost: $120,000  Sales Price: $150,000 plus all recaptured depreciation.

With the above numbers, all depreciation on all assets is correctly recaptured and taxed with no issues.  As a reminder, take special note that recaptured depreciation is added to your overall AGI. Therefore it has the potential to bump you into the next higher tax bracket.

[Carl]

Does this mean I can have any arbitrary allocation as long as a gain is showed for all the assets.

That is correct. So you don't have to worry about "evenly" allocating the gain across all assets. You can have a $1 gain on one asset, and a $1M gain on another. That's fine. A gain is gain, period.

Just keep in mind that you are allocating across your "depreciated" assets. So your land price will not change since land is not a depreciated asset.

Example:

Purchased property in 2010 for $100,000 as your primary residence. Converted to a rental in 2015. When setting it up in TurboTax back in 2015 you had:

COST: $100,000

COST OF LAND: $30,000

The program "does the math" in the background and depreciates the difference of $70,000 over the next 27.5 years.

In 2016 to put a new roof on at a cost of $20,000. WHen you enter that in TurboTax:

COST: $20,000

COST OF LAND $) (ZERO DOLLARS)

The program depreciates that $20,000 over the next 27.5 years starting on the 2016 "in service" date.

So at this point your total cost basis on the property is $120,000 with $30,000 allocated to the land, and the remaining $90,000 being depreciated. In 2019 you sell the property for $150,000. You can allocate the sales price as follows:

LAND COST: $30,000   LAND SALES PRICE: $40,000 ($10,000 gain on the land.)

STRUCTURE COST: $70,000 STRUCTURE SALES PRICE:$80,000 (gain on the sale of the land will be MORE than $10,000 because the recaptured depreciation on "this specific asset" gets added to that sales price.)

ROOF COST: $20,000 ROOF SALES PRICE: $30,000 (gain on the sale of the roof will be MORE than $10,000 because the recaptured depreciation on "this specific asset" gets added to the sales price.)

TOTALS: Cost: $120,000  Sales Price: $150,000 plus all recaptured depreciation.

With the above numbers, all depreciation on all assets is correctly recaptured and taxed with no issues.  As a reminder, take special note that recaptured depreciation is added to your overall AGI. Therefore it has the potential to bump you into the next higher tax bracket.

[44619herman]

Hi Champ: Thank you for the information. I have a question as follows: In 1983, I placed my house in service as a rental property (11/1/1983). At that time, the cost basis of the house and property was $64,714 (land $12,000 and house $52, 714). I was able to use straight line depreciation over the next 15 years and totally depreciated the house ($52,714) to $0 at the 1998 tax year. Now,  I sold the house in Feb. 2021. Somewhere, after tax year 1999, I started using turbo tax. I never put the house and land into the asset worksheet since the house was totally depreciated.  Is there a way now to add the house (ie original cost basis, depreciation taken)or should I just complete the appropriate schedules (ie 4797 Part 1 for land, Part III for building -including section 1250 recapture amounts, and schedule D for capital gains and also the individual disposal of all remaining assets in the asset worksheet (i.e. stove, windows, etc). thank you

[DianeW777]

The easiest action is to enter the asset into your rental activity assets listing all the original dates and costs.  Then TurboTax will calculate all of the depreciation that had been used on the asset and allow you to select that it was sold, and enter the sales information like you did on the other sale. TurboTax will calculate and carry the gain to the appropriate locations on the 4797 and Schedule.