What year to use for rental property sale valuation?

[ukrkoz]

We lived in a house since 2005. In 2015, we converted it to rental property and moved out.

We sold that property last year, still as a rental, after tenants moved out. Sale took about 2 months or so.

I am working on my rental property sale and noticed that, since the time we purchased property in 2005, there is significant change in land to improvements(structure) value ratio.

Do I still use the original base for the house or, 2020 county tax valuation ratio? For 2020 tax return? TT pulled the original data from previous returns.

Thank you

[DianeW777 · Accepted solution]

TurboTax is using the correct information. The original cost of the home reduced for depreciation is the cost basis for your sale. You never use tax assessment values or fair market value at the time of sale. If your improvements were never entered as an asset at the time they were completed and placed in service, you can use the cost basis but it must be reduced for any depreciation that would have been allowed if you had put it on the tax return.

The IRS requirement is that you use or lose your depreciation expense.  The exact wording is allowed or allowable.  Once you determine the actual amount of your cost remaining after any depreciation expense that would have been allowed, you can enter that as part of your expense of sale.

You can also add the improvement as an asset for 2020, with the original date placed in service to receive your expense for 2020 and it would also provide the depreciation figure you may need to reduce that basis.  See IRS Publication 527, page 11 for the 27.5 year chart.

The selling price should be prorated for each asset then entered for each asset when you indicate they were sold or disposed of. You will not lose the remaining depreciation because you will use the remaining basis against the selling price to determine gain or loss. 

To figure out the selling price for each asset:

1. Take the current basis of each asset against the total combined basis of all of your assets to figure out the sales price for each one; OR 
2. Determine a fair market value for each asset against the total value of all assets to figure out the sale price for each one. 

If you  made any capital improvements in the year of sale, you should add that as part of your selling expense. 

The following steps will help you through the sales process once you have all the figures you need.

1. Start with the Federal tab
2. Click on Income and Expenses
3. Under Your income and expenses, scroll down to
4. Rental properties and royalties, click Edit/Add
5. Do you want to review your rental?, click Yes
6. Under Rent and Royalty Summary, click Edit
7. Click Update to the right of Assets/Depreciation.
8. Do you want to go directly to your asset summary?, click Yes and Continue
9. Click Edit to the right of the assets to be disposed
10. Go through several screens until you get to Tell Us More About This Rental Asset
11. Click on This item was sold…….
12. And continue to answer the questions

See also here for more details.

[ukrkoz · Accepted solution]

Thank you.

Will you, please, clarify, what is considered assets for that table? Land, that is easy, land is land. What falls into assets category?

[DianeW777]

Yes. If you have capital improvements in addition to the original rental property that would be an asset.  If you had any equipment or shed for example, and if they were sold with the rental each would be a separate asset. This is just a couple of examples.

If you have only the house on the depreciation schedule then that is the only asset you are selling besides the land.

You indicated you had improvements that seemed like you hadn't entered as an asset before the year of sale, if that's true then you must follow the information above to account for the depreciation that you would have been allowed had you included it at the time it was completed. If your only improvements were in the year of sale, then that would be added to your sales expense to arrive at the correct gain on the sale.

Fair market value or tax assessment values cannot be used as your cost basis.  It is what you actually paid, less depreciation to arrive at your cost basis.

[ukrkoz]

Thank you for fast response.

House IS then an asset, right? Silly as it may sound to ask.

We had, of course, lots done in 15 years of ownership. Driveway, irrigation system, new appliances, multiple garden beds, new HVAC.  Full house generator backup. It's an acre property, so all kinds of lawn equipment. Property was purchased with shed.

I really appreciate your help. It's the first time I am dealing with rental sale. We own 3 more, this will be good training for me.

[ukrkoz]

Of course house is an asset. It is called capital asset.

Thank you for help.