This will be entered as Sale of Business Investment. The depreciation recapture will need to be accounted for to ensure an accurate tax return.
You said that there was a Schedule E for 2020 with a minimum amount of depreciation. Was this marked as no longer a rental?
Here is an answer from Champ Carl that is about your situation. He is advising to leave it as a rental to make recording the sale easier. If the house is still listed as a rental, that may be the easiest way to account for the sale and handle the depreciation for the house and other depreciating improvements. The dates in his answer are not current, but the information has not changed.
"Yes, you can convert the property to personal use if desired. But then when you sell the property you can "NOT" report the sale in the Rental & Royalty Income (SCH E) section of the program. You have to report it in the Sale of Business Property section. But this is going around your elbow to get to your thumb, as it's much more prone to user error. If you did not live in the house for one single day as your primary residence, 2nd home, or use it as a vacation home for one single day after the last renter moved out, there's no need to convert the property to personal use, and makes no sense to do so if there was "in fact" no personal use of the property in 2018. Just leave it classified as residential rental real estate. That's the easiest, simplest way to do this and not have to deal with all the *manual* math you will be "required" to do on your own for things such as depreciation recapture and utility expenses.
Just report the number of days rented in 2018 as 1 (one) day. (The program will not accept zero days). Then your rental income will be zero for 2018.
For expenses, you can fully and completely deduct all rental-related expenses such as utility bills (electric, water, etc.) and repairs. Then for those things that qualify as property improvements, you'll add them to the assets section with 0% business use. (I think the program won't accept zero percent business use, so just make it 0.1% business use. The depreciation will be minimal if not zero). Then you can report the sale in the rental section and the program will do all the math *for you*".
you asked, "Was this marked as no longer a rental?" where would i find this info? on Form 4562, second column titled "code" there are "S" in each row. notes at bottom of form state S means SOLD, but I did not sell it. i am getting so confused. i may have screwed up on my 2020 filing. according to Carl I should have NOT marked it as converting it to personal use. do I need to file an amended return?
should i ignore what i did in 2020 form, i.e. converted it to personal use on 1/1/2020, and just treat my 2021 return as residential rental real estate to report the sale?
@Carl I spoke to you last year about this and at that time you suggested converting it personal use for 2020 return. could you please PM me?
You have a fair number of threads posted in 2021. Can you point me to it? https://ttlc.intuit.com/community/user/viewprofilepage/user-id/1631499 and scroll down. I'd like to refresh my memory before potentially contradicting myself.
hi Karl - can you go to your PM where we were discussing my situation (https://ttlc.intuit.com/community/notes/privatenotespage#)
its in my PM messages to you, not the regular threads. it was last week of March 2021. one of your messages states, stated
"What I suggest you do on your 2020 taxes since you did not rent it again after the last tenant vacated in 2019, is that you convert the property to personal use on 1/1/2020.
Now the program has a "quirk" where you have to enter "something" for rental income - even if that "something" is the digit zero. So enter zero for rental income.
Then, don't bother even working through the rental expenses section, as you can't claim/deduct anything on SCH E since you reclassified it as personal use property on 1/1/2020.
Next, in the assets/depreciation section DO NOT enter any of your property improvements here. I'm talking about all the new appliances, floors, carpets, etc. There's no need. it's just a waste of time since your improvements can not be depreciated anyway, since they were never placed "in service" as a rental asset.
But you do need to work through any assets that are already there to convert them to personal use. At an absolute minimum, you will have at least the property itself listed there.
So start working it through and on the screen for "I stopped using this asset in 2020" click YES. Then enter the disposition/conversion date of 1/1/2020.
On the "Special Handling require?" screen, you *must* select YES. If you select NO, then you will be *forced* to enter sales information. You don't want to report the sale in the SCH E section. You want to report the sale in the "Sale of Business Property" section, so that you can include in your cost basis, the amounts you paid for the qualified property improvements.
When you get that done, post back and let me know the number of assets you have listed in the assets/depreciation section."
now I see you do not recommend that move but i already did it for 2020 return.
I have PMs turned off.
Having converted the property to personal use on the 2020 tax return, it should not even be on SCH E on your 2021 tax return.
Basically, you need to print out the two 4562's for that property and the 8832 from the 2020 tax return, as it has all the information you need to report the sale in the Sale of Business Property section.
@CarlI have 8 items listed on my Amortization page. Do I need to go thru each of of these one at a time in TT to indicate sale (like i did when i converted them to personal use) or does TT treat them as one upon the sale of the house?
They are not treated as one. You do need to allocate a selling price to all assets that are part of the sale. The word amortization can be misinterpreted. If you are referring to each asset that was placed on depreciation then follow the steps below.
If you do have amortization for refinance loan fees as example, this will be handled differently. Update this thread with the information if this applies to you. If you do not have this you can disregard.
Please use the example below for all assets listed on depreciation for the rental property sold.
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:
- 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
- Determine a fair market value for each asset against the total value of all assets to figure out the sale price for each one.
Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset. Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.
Example: Original Cost (of each asset on your depreciation schedule)
$10,000 Land = 13.33%
$50,000 House = 66.67%
$15,000 Improvements = 20%
$75,000 Total = 100%
Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.
yes I do have amortization for refinance loan fees (2013 Refinancing Fees)
yes I do have amortization for refinance loan fees (2013 Refinancing Fees)
Assuming they were entered correctly in the asset/depreciation section, this is how you will handle that one entry, and that entry only.
DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING OR SELLING
In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.
- On the "Review Information" screen click Continue.
- On the "Did you stop using this asset 2021?" screen, click YES.
- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.
- On the "Special Handling Required?" screen, click YES.
- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.
You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."
@Carl before we go that far, TT (Income Reported on your 2020 return page) asks me to say yes or no to the following "Rental Real Estate and Royalties: Rent or royalties from my rental (Schedule E)", and it lists my rental which I converted to personal use on 1/1/2020. Do I say yes or no on this page? i'm thinking if i say "no", then i will lose my schedule E info from 2020.
TT also asks if I sold any investments in 2021 to include stocks, bonds, mutual funds, a second home, collectibles, personal items...since i sold my property (rental/personal use home) 3/3/2021, that would be a "yes" response, correct?
DianeW777 how would i calculate the "cost of property (or tax basis) plus expense of sale"?
@DianeW777in TT it is asking under "Sales of Business or Rental Property" what type of property is this? I can't figure out if i should select "Property other than real estate that I took depreciation on" or "Real estate that I took depreciation on" for each item in my list. my list in Form 4562 include:
rental rowhome
windows
basement
refrigerator
oven
dishwasher
hvac
upon sale of rental and form 4562, is the house and land the only thing considered "real estate"?
items on Form 4562...
rental rowhome
windows
basement
refrigerator
oven
dishwasher
hvac
Land is never depreciated. Only the house/structure, along with any other property improvements are depreciated. If you'll look at the 4562 that prints in landscape format, typically the first entry is for the property itself. You'll see where the "Cost (Net of Land)" is the value of the structure, and that's the value that's depreciated. The amount in the "Land" column is not depreciated.
The total acquisition cost for that item is Cost (Net of Land) value, plus the Land value. The total of all your SEC1250 assets is the total of all items in the Cost (Net of Land) column. Do not include amortized assets in that total. In the end, the sale of those assets will be reported in Part III of the 4797. The sale of the land will be reported in Part I if you held the property for more than 1 year.
The items you list are described below. Items 1, 2, 3 are considered real estate and should be on the depreciation statement as 27.5 year recovery.
See the notes on the appliances and the HVAC would not be real estate but is part of the house sale with approximate 15 year life.
-
Rental Row home - The house
-
Windows - Capital Improvement
-
Basement - Capital Improvement
-
Refrigerator - Appliance and depends on the age if you allocate any part of the sales price to it.
-
Oven - Appliance and depends on the age if you allocate any part of the sales price to it.
-
Dishwasher - Appliance and depends on the age if you allocate any part of the sales price to it.
-
HVAC - Possibly a lesser life than the house itself
Use the depreciable assets to determine the selling price of each asset. This example is how to arrive at the sales price for each. If as I indicated the appliances have reached the sixth year of depreciation, they may not worth a portion of the sales price. If you find that is the case, you can eliminate them from the equation like they don't exist.
Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset. Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.
Example: Original Cost (of each asset on your depreciation schedule)
$10,000 Land = 13.33%
$50,000 House = 66.67%
$15,000 Improvements = 20%
$75,000 Total = 100%
Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.
so the following are SEC 1250 (and the rest are SEC 1245)?
Rental Row home - The house
Windows - Capital Improvement
Basement - Capital Improvement
you are correct that all appliances have reached the 6th year of depreciation, but not HVAC. Where does the land fit in all this? I know it is not depreciated but is it included in all my calculations, i.e. original cost and sales price/expenses?
SEC1250 property becomes "a part of" the structure. Things like a new HVAC system, new windows, etc.
SEC1245 property would be things not part of the structure. For example, furniture, new refrigerator/freezer, etc.
But a new hot water heater is SEC1250 because it does become a part of the plumbing system, which is already a part of the structure.
@Carl The total acquisition cost for that item is Cost (Net of Land) value, plus the Land value. The total of all your SEC1250 assets is the total of all items in the Cost (Net of Land) column. Do not include amortized assets in that total. In the end, the sale of those assets will be reported in Part III of the 4797. The sale of the land will be reported in Part I if you held the property for more than 1 year.
What specific items are you referring to when you say "Do not include amortized assets in that total. "? They are all amortized. Regarding land, how do i calculate sales price of land and should TT be putting land in Part I automatically (because it's not)?
What specific items are you referring to when you say "Do not include amortized assets in that total.
Financing fees, and/or refinancing fees.
Capitalized assets are those depreciated over time. Amortize assets are usually intangibles (like financing fees) that get deducted over time, not depreciated.
Amortized costs are clearly identified on the 4562 that prints in landscape format titled "Depreciation & Amortization Report", as indicated in the image below for one of my properties.
@Carl Regarding land, when selling rental, how do i calculate sales price of land and should TT be putting land in Part I automatically (because it's not)?