Rental Property Sale Gain/Loss Question
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Returning Member

Rental Property Sale Gain/Loss Question

I am trying to understand how to record the sale of my rental property. I purchased it in 2005 for $350,000 as my primary residence. I converted it to a rental property in 2013. At the time I converted it its FMV was $250,000 although the mortgage I owed was still $350,000 (I/O unfortunately - underwater). I sold the Condo this year for $320,000 with an existing mortgage of $300,000. Over the time I rented the condo I claimed $40,000 in depreciation write-offs. I believe my tax basis would be $210,000 ($250,000 - $40,000). TT is telling me I have a gain of $110,000 although I only walked away with $20,000K from the Sale of the condo less the existing mortgage. Is there somewhere I should be recording what I paid for the property so that my gain (or loss) aligns to what I originally paid for the property?

20 Replies
Employee Tax Expert

Rental Property Sale Gain/Loss Question

I am assuming that when you begin initially in the program that you indicated that you were converting the house from personal to rental. At that time, you would have entered the cost.

 

The mortgage is irrelevant. All the IRS takes into consideration is Sales Price minus basis. Your basis can be adjusted by improvements, sales expenses and depreciation.

 

 

Sale of rental house if conversion of a primary residence to a rental : In order to calculate the capital gain or loss when you sell a residence that had been converted to rental property, you need to know three things:

  • Your adjusted tax basis in the property (both at the time of the conversion and the time of the sale)
  • The sale price
  • The fair market value of the property when it was converted to rental property

If the converted property is later sold at a gain, the basis for purposes of determining the capital gain is your adjusted tax basis in the property at the time of the sale. If the sale results in a loss, however, the basis used is the lower of the property's adjusted tax basis at the time of the conversion or the fair market value when the property was converted from personal use to rental property. This loss rule ensures that any deflation in value occurring while the property was held as a principal residence does not later become deductible upon your sale of the rental property; a loss on the sale of a principal residence is not deductible. As usual, you calculate your capital gain by subtracting your adjusted basis from the sale price of the property.

 

 

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Level 11

Rental Property Sale Gain/Loss Question

When you are going through the "asset" in the rental section to indicate it was sold, say "YES" when it asks you about "Special Handling".

 

Then report the sale in the "Sale of Business Property" section.  Use your $350,000 purchase price, $40,000 of depreciation, and a $320,000 sales price, you would have about a $10,000 gain.

 

HOWEVER, after factoring in selling costs (and exact numbers, rather than rounded numbers), using those numbers MIGHT show a loss, which is NOT allowed in your case.  *IF* that happens, TurboTax is not set up for that, and you will either need to manually manipulate things to show a $0 gain/loss or go to a tax professional.

Returning Member

Rental Property Sale Gain/Loss Question

And how would you manipulate things within Turbotax to show $0 loss or gain?  Would you have to explain that somewhere?  Wouldn't that be an red flag for being audited too?

 

I have a similar situation and cannot figure out how to use the software to show the correct scenario.

Expert Alumni

Rental Property Sale Gain/Loss Question

The capital gain of $110,000 is correct.  When you converted the property to a rental its adjusted basis was $250,000.  When you sold the property its adjusted basis was $210.000 ($250,000 less $40,000 in depreciation).  Your capital gain is selling price $320,000 less adjusted basis $210,000 which equals $110,000.   What you owe and have to payoff is not a factor when computing capital gain on a rental property.   Capital gain does not necessarily equal the cash you receive in a sale.

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Level 11

Rental Property Sale Gain/Loss Question


@LeonardS wrote:

The capital gain of $110,000 is correct.  When you converted the property to a rental its adjusted basis was $250,000.  When you sold the property its adjusted basis was $210.000 ($250,000 less $40,000 in depreciation).  Your capital gain is selling price $320,000 less adjusted basis $210,000 which equals $110,000.   What you owe and have to payoff is not a factor when computing capital gain on a rental property.   Capital gain does not necessarily equal the cash you receive in a sale.


 

No.

 

When the property was converted, the DEPRECIABLE Basis was $250,000.

The Basis for calculating a LOSS is $210,000 ($250,000 minus $40,000).

The Basis for calculating a GAIN is $310,000 ($350,000 minus $40,000).

Level 11

Rental Property Sale Gain/Loss Question


@CH99 wrote:

And how would you manipulate things within Turbotax to show $0 loss or gain?  Would you have to explain that somewhere?  Wouldn't that be an red flag for being audited too?

 

I have a similar situation and cannot figure out how to use the software to show the correct scenario.


 

The software is not set up for that.

Employee Tax Expert

Rental Property Sale Gain/Loss Question

You will have to calculate it and do it by hand. No, it is not a red flag. The IRS themselves formulated this.

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Returning Member

Rental Property Sale Gain/Loss Question

I have a case similar to message id 117873. At the end of the thread you advised that the "you will have to calculate it and do it by hand".  How do we enter the hand calculations?

 

This was for sale of rental property, that was once used as personal residence.

 

If Gain: Net Proceeds from sale - (Cost - depreciation + improvements).

This is a large negative number, so no gain.

 

If Loss: (FMV at time of rental) - depreciation + improvements - net proceeds from sale.

This is also a large negative number, so treat as zero according to IRS Publication 544 page 5.

Loss is not based on Cost, but FMV to limit losses to the time the property was for business use (loss during personal used cannot be deducted).

 

When entering sale of property info into turbo tax, it asks for the cost bases (not FMV), when I enter the actual cost, I get a loss based on acquisition costs, which I know from Pub 544 will not be allowed. But when I enter FMV as the cost basis, I get a large gain, which I also understand is incorrect.

 

Employee Tax Expert

Rental Property Sale Gain/Loss Question

The IRS gives direction on how to calculate, but not what to do with the calculations once you have them. My guess would be to send both versions of the sale to the IRS, meaning two separate Forms 4797. This is the only way to demonstrate this.

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Returning Member

Rental Property Sale Gain/Loss Question

Do I have to use TT business edition to enter gain on sale of rental or doe the deluxe version handle it?

Expert Alumni

Rental Property Sale Gain/Loss Question

No, you will need Premier to be able to enter sale of rental property.

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Returning Member

Rental Property Sale Gain/Loss Question

I've got the CG and depr recoup amounts calculated but cannot find a place to enter them in TT PREMIER 2019

Am a 20 year user of TT and rental property owner.

I have 2019 TT Premier and the only navigation I can find is under INCOME --> RENTAL where indicate the property was sold and it deletes it from the form.. In previous years, TT had a search dialog box that would contain a direct link to the topic area. But that's not in the the 2019 Premier version? All I get when searching from within the app (for anything) are the postings from the TT community.

Thx!

Level 15

Rental Property Sale Gain/Loss Question

I am trying to understand how to record the sale of my rental property. I purchased it in 2005 for $350,000 as my primary residence. I converted it to a rental property in 2013.

By your dates, that confirms that you do not qualify for the "lived in 2 of last 5 years" capital gains tax exclusion. You "will" pay taxes on any and all gains realized. If sold at a loss, you will be allowed to deduct losses not only from the passive rental income, but also from your other ordinary income, up to a fixed limit each year.

At the time I converted it its FMV was $250,000

Assuming $250K was the basis you used on the SCH E for depreciation, you were correct in using that basis. The law is, you depreciate based on the "lower" of what you paid for it, or it's FMV at the time of conversion.

 

This means that you can not report this sale in the Rental & Royalty Income (SCH E) seciton of the program. If you do, then your gain or loss will be based on a cost basis of $250K, and that is not right. You have to report this sale in the "Sale of Business Property" section of the program. But before you can do that, you need to get a few numbers from the Rental and Royalty Income (SCH E) section of the program. Namely, the total of all depreciation taken on the property.

Start working through the property in the SCH E section of the program and do indicate that you "sole or otherwise disposed of this property in 2019". Continue working it through reporting/entering any rental income received as well as any rental expenses incurred.

Next, start working through the "Depreciation/Sale of Assets" section. You must work through each individual asset one at a time, and you'll need to write down numbers while doing this. So have pen and paper handy.

For each asset select the option for "I stopped using this asset in 2019".

On the "Special Handling Required" screen, select YES. (If you select NO you will be "forced" to enter sales information. We're not reporting the sale in this section.)

When asked for your disposition date, enter the closing date of your sale.

You need to write down (for each asset) the "prior year's depreciation" and the "current year's deprecation".

For any property improvements you did ***AFTER*** you converted it to a rental, add your cost basis for that property improvement to your original $350K that you paid for the property.  This will give you your "true" adjusted cost basis.

When done with all assets, add up all the depreciation figures you wrote down to get the total of all depreciation taken on the property while you owned it.

If at any time you claimed "any" vehicle expenses for this rental, even if less than 100% business use, you have to work through the vehicle expenses section to show your disposition of the vehicle. I seriously doubt you sold the vehicle as a part of the rental property sale transaction. So just indicate that you removed the vehicle from the business for personal use. Again, the date will be the same as your closing date on the sale.

 

Finish working through that rental to completion. When done, you have written down all the info you need to report the sale in the "Sale of Business Property" section now.

Returning Member

Rental Property Sale Gain/Loss Question

This doesn't seem to work. I have property bought at 435k, converted to rental at 280k and sold at 345k.

 

As a profit, basis is computed from 435k, and therefore net gain is 0.

As a loss, basis is computed from 280k, and therefore net loss is 0.

 

In the business sale section:

 

If I try to enter as a profit in turbotax (using 435k), and it sees a gain less than 0, it converts it to a loss (which is NOT what it should do.) If I try to enter as a loss (using 280k), it sees a loss less than 0, and converts it to a gain (again, this is NOT correct).

 

How do I get turbotax to enter two separate 4797 forms with gain 0 and loss 0 respectively? 

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