Advice on how to report sale of rental property in complicated situation involving many owners

[honem]

We have a complicated situation where several family members co-owned a rental property for 7 years. One of those family members actually lived in the house for 3 of the last 5 years, both at the same time as other rooms were rented out, and also (for the past year) on her own. This property was sold in 2022. We did not rent the house at all in 2022. I have read many related posts on this issue, and some very helpful advice especially from users @Carl and@golies. I think I have decided to handle the sale for the non-resident family owners under the "Sale of Business"/Form 4797 rather than through the "Rental Real Estate"/Schedule E pathway, since we rented the house 0 days. I haven't quite figured out the best way to handle the sale for the 1 family member owner who actually lived in the house. The 2022 TurboTax Premier CD version does let me fill out and keep Schedule E as long as I designate 0 rental days, but don't check the subsequent box that it was not treated as a rental. I do have copies of our 2021 return and all forms, including 8582. I have 2 specific questions:

1) I'm choosing to calculate each non-resident owner's share of the cost basis and sales price and put these values in the Sale of Business section. I'm also able to enter total depreciation taken, based upon the values I have from each owner's 2021 return. However, I can't figure out where to put the prior year's unallowed Passive Activity Losses. I understand that I shouldn't just tack this PAL onto the cost basis of the house (since it should be counted as regular income rather than capital gains). User "golies" mentioned that they put the unallowed PAL in the "ordinary income" on Line 8 of Schedule 1. I just want to verify that this is a legitimate way to enter this data. In our case, the cumulative unallowed PAL is a large value, and I'm a bit nervous that this might be a red flag for audit, since it may be unclear where this value is coming from.

2) For the family member who used this home as both her primary home and a rental property, I'm wondering what is the most accurate way to enter this data into TurboTax, and/or what the least complicated way is to enter this data into TurboTax, realizing that these might not be the same pathways. It seems that in addition to the option of entering the sale into the Rental Property pathway or the Sale of Business Property pathway, there's also the option of entering it as the Sale of Primary Home. In reality, the gain is small enough that it will not come anywhere near the $250K exclusion.

I appreciate any and all advice.

[Carl]

I'm to afraid to touch this one, for several reasons.

1. From my perspective, the complexity of this situation is beyond the scope of "any" public user-to-user forum; not just this one.

2. Don't know how many owners their are or their relationship to each other. (maybe there's like 3 owners, and two of them are married to each other for all I know?)

3. Since there's no indication of what software program you're using, there's no way to know if each owner reported their share of rental income/expenses on SCH E directly on each of their personal 1040 tax returns, or if a 1065 partnership return was filed and each owner received a K-1 for their share of income/expenses. Maybe the property was held in an S-Corp?

4. For the owner that lived in one room of the property while other tenants were there, don't know if that one owner had to pay rent to the other owners, and/or if that one owner was still collecting a share of rent from the other tenants. 

Overall, the potential complexity of this situation would warrant a hands-on face-to-face with a qualified tax preparer licensed as such in whatever state this is in. Especially if your state, or the state of any of the owner's also taxes personal income.

A 2nd possibility to consider (which I would not do myself in this scenario) would be the "TurboTax Full Service" option, where a certified tax professional will do the taxes for you, realizing that accuracy is based soley on the information provided to that professional. They offer full service for both personal taxes, and business taxes in case it's a 1065 partnership return or corporate return you are filing here.

As for me, I think I'd have to be out of my mind to even try. 🙂