Valuing improvement assets after halt of rental business

[RuffyK]

If a Rental (100% business use) was taken off market to sell, and rental activities (and therefor depreciation) stopped, but property did not sell for a long time, and the assets (had they had been depreciated) would have eventually zeroed out on the books during the time the property was for sale, how should that be handled when property is finally sold?

Example:

1/1/2000 - House purchased:  $100,000

1/1/2009 - Asset (Back Deck) Acquired:  $10,000

1/1/2023 - Rental activity (and depreciation) ceases as property is listed for sale, (Deck is still on books.)

1/1/2024 - Property still for sale, however, deck would have fallen off books, (due to 15 year life)

1/1/2025 - House finally sells:  $200,000

I am thinking the recapture on deck would be left off the sale entirely as any depreciation recapture would be negated because of the age of the deck. Is that correct?

- Not owner occupied/lived in  -

Thank you!

[AmyC]

The allowed or allowable depreciation is complete on the deck. You are right, it is fully depreciated. Yet, it is still an asset.

The house, land and deck are all allocated a share of the sale based on the original percentage.

To get the percentages, use original cost:

• Deck = $10k / $110k total of purchases = 0.0909 = 9% or 9.1%
• House = $x / $110k
• Land = $y / $110k

Use those percentages times the sales price to get the sales price for each item.

• Deck = .09 x $200k = $18,000 sales price
• House
• Land

[RuffyK]

I see, if the asset is still in use, then recapture will happen - that makes sense.

What happens if an asset is no longer in use when the property is sold? For example, if a storage shed was removed from the rental property and moved to the owners main residence while the rental was being remodeled and put up for sale?

[DianeW777]

It depends. In your example, the storage shed was not sold, but rather converted to personal use. In this scenario, you will select, This asset was sold, traded, converted... etc. There will be no sale date and you will indicate it was converted to personal use since it is no longer part of the rental property.

It will continue to be a taxable asset for the IRS until it is sold or junked, so it's important to keep all of the records about this storage shed until it is disposed of.

@RuffyK 

[RuffyK]

Using TurboTax I tried my best to convert the property from rental to 'personal use' on 12/31/22, and I have the depreciation schedule from then. There was no Schedule E filed for 2023 because there was no attempt to rent it then, (or subsequently.) As far as I can tell from my records, the only thing TurboTax provided for my filling in 2022 was the standard Schedule E and the Depreciation/Amortization report, but it didn't list any 'date of conversion' that I could find. But in 2023, and after, there was nothing else provided for the rental on any of the tax forms. Can you please tell me how to indicate that a specific asset was junked, while the others are still intact and included with the sale of the property?

[DianeW777]

If any asset is junked, you should note that in your tax files should you need it later, however there is nothing to put on the tax return itself for a junked asset. It's more of a paper trail since they are taxable assets until disposition.

Since the rental is not on your tax return and you did sell it in 2025 here are the steps to enter the sale of your rental property. Use the detail you have from your 2022 tax return to enter your sale. Any depreciation will be recaptured with a maximum 25% rate, if your regular tax rate is higher. This is considered Section 1250 property, depreciated under the straight line method so this is capped at the rate noted.

Sale of Business Property:

1. Income and Expenses at the top
2. Scroll down to Other Business Situations
   • For TurboTax Desktop: Business Income and Expenses > Less Common Business Situations
3. Select Sale of Business Property
4. Select Sales of business or rental property that you haven't already reported.
5. Answer 'Yes' to Do all of the following apply...?
6. Enter your sales information:
   1. Description of the Property (Rental, Address)
   2. Sales Price/Sales Expenses 
   3. Date acquired and date sold
   4. Cost
   5. Depreciation

@RuffyK