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Sold schedule c rental home

We bought a second home in 2005 to flip but ended up renting it since then. We reported rental income and expenses including depreciation on Schedule C, netting out to a small loss on paper (less than $10k each year) using Turbo Tax Premier.  We sold the house in 2021 for $348k (sale price less realtor and other fees) and our purchase price was $381k (price plus closing costs and related expenses). Total depreciation taken thru 2020 (per TT) is $173k. Do we use Form 4797 to report this sale? How much is Schedule C depreciation in 2021 since we didn't own the house all year? And there's a net loss based on the sale and purch prices, but with depreciation TT is calculating a gain of $140k - do we owe capital gains tax on this amount?! Thank you.

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5 Replies
LeonardS
Expert Alumni

Sold schedule c rental home

Could you please clarify did you report your rental income/expenses on Schedule C Profit or Loss from Business and not on Schedule E?

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Sold schedule c rental home

Correct, we were advised to use Schedule C and write it off as a Rental Property business. We've never lived in the house, it's out of state, if that matters. Thank you!

PattiF
Expert Alumni

Sold schedule c rental home

The rental property should have been reported on Schedule E. 

 

Generally, landlords filing 1040 or 1040-SR returns will report their rental income and expenses on IRS Schedule E: Supplemental Income and Loss.

However, if you provide "substantial services" to your tenants or your real estate business generates rental income, use Schedule C: Profit or Loss from Business.

Substantial services go above and beyond the basic services typically provided to renters (utilities, maintenance, landscaping, trash collection, etc.). If you’re providing hotel-like perks such as regular cleaning or maid service (in excess of 10% of the rental cost), fresh linens or towels, in-room coffee, transportation, or sight-seeing, you’re providing substantial services, and that means you'd file Schedule C.

 

Yes, you would use Form 4797 to report the sale of the rental property. The depreciation for the house for 2021 would be for the time that you owned the property in 2021.

 

From the numbers that you entered, there does not seem to be a capital gain on the actual sale of the house. But there is depreciation recapture that is taxed.

 

Rental property depreciation recapture is the gain that the real estate investor receives from selling the investment property, and it must be reported as income to the IRS. This can hurt an investor because it’s additional income that you have to pay taxes on based on your ordinary tax rate, which can be in addition to capital gains tax. Depreciation of rental property should be reported on IRS Form 4797.

 

When you take depreciation, you’re adjusting the property’s cost basis downward. So, when you sell the property, you have to pay taxes on it because you previously offset some of your ordinary income taxes by claiming depreciation. Depreciation recapture is assessed when the property’s sales price exceeds its adjusted cost basis. An adjusted cost basis just means the net cost of the asset after it’s been adjusted for depreciation. 

 

Keep in mind that capital gains tax on real estate is also due when you sell an investment property for more than you purchased it for. Part of the profit is taxed as a capital gain and may qualify for the 20 percent capital gains tax, and the other part of the profit is taxed at the ordinary tax rate, which is generally higher than the capital gains tax rate.

Part of the profit is taxed at the ordinary tax rate because it was depreciated over time. The IRS uses rental property depreciation recapture as a way to collect taxes on profits from the sale of a rental property. This is because the taxpayer was able to previously write depreciation off against their taxable income during their ownership of the property.

 

 

 

 

 

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Sold schedule c rental home

Thank you! Need to digest the info you provided, but - we've owned this one rental house for 16 years, and every year have reported rent and expenses on Schedule C, not Schedule E. Is there anything we can/should do about that now, or is it too late because it's been so many years and now the home is sold? Sounds like we should still use Form 4797 which we'll figure out. Thank you again!

ColeenD3
Expert Alumni

Sold schedule c rental home

Yes, you would enter it under Sale of Business Property. This should have been on Schedule E, not Schedule C. Schedule C is used if you provide services such as a motel or bed and breakfast.

 

I'm curious as to how you got the depreciation to be straight-line over27.5 years. If you took losses you were not entitled to, since rental property produces passive income, you should see a professional and file Form 3115.

 

Steps for Sale of Business Property

 

1) Wages and Income

2) Other Business Situations

3) Sale of Business Property

4) Other Property Sales

5) Select Sales of Business or Rental Property that you haven't already reported

 

Below are the IRS links related to the change in accounting method. TurboTax does not have that form.

May be these will help

Form 3115, Application for Change in Accounting Method

Change-in-Accounting-Method

Instructions for Form 3115 (03/2012) 

Instructions

Form 3115,

Form 3115

 

 

 

 

 

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