selling assets using TT Premier

[gjgogol]

again I am specifically talking about refinancing fees such as points. In another thread @Vanessa A stated that

"No, refinance fees are not subject to recapture.  Refinance fees, such as points, are amortized over the life of the loan and not really attached to the house.

Other fees, such as title fees that are attached to the house would technically be added to the cost basis of the house and would have been depreciated along with the house so they would not be accounted for separately."

do you agree with @Vanessa A, if not why not?

[DianeW777]

Yes. Our awesome Tax Expert @Vanessa A has provided accurate information in regards to refinance fees for rental property.

In a year of sale of the rental property they are also handled differently than the depreciable assets.  The remaining balance of fees that have not been deducted at the point of sale are expensed as follows:

Deduct the balance of the refinance fees when the rental is sold: In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your fees.

1. On the 'Review Information' screen click Continue.
2. On the 'Did you stop using this asset 2021?', click YES.
3. On the 'Disposition Information', in the disposition date box enter the date you closed on the sale. > Continue.
4. On the 'Special Handling Required?', click YES.
5. On the 'Depreciation Deduction Amount', select Transfer These Fees For Me To Other Expenses. > Continue.
6. You'll see the remaining fees of the refinance loan to be deducted in the Rental Expenses section. The entry will start with 'Unrealized Refinancing Fees....'

@gjgogol

[gjgogol]

Since land is not depreciated and appears in Part I of Form 4797, is it appropriate to include the original cost of the land only in both column (d) gross sale price and column (f) Cost or other basis, plus improvements and expense of sale? So Part I would appear as follows:

(a) description: land

(b) date acquired: 11/24/2006

(c) date sold: 3/3/2021

(d) gross sale price: $36,000

(e) depreciation: $0

(f) Cost or other basis, plus improvements and expense of sale: $36,000

(g) gain or (loss): $0

All improvements and expense of sale would be allocated to the house and other Form 4562 assets.

[gjgogol]

@DianeW777since i converted property to personal use on 1/1/2020, TT actually expensed the refinance fees on my 2020 return. I sold the property 3/3/2021 and I wasn't sure how I am to handle the amortized/depreciated refinance fees.

[AmyC]

The land argument sounds good in theory and is okay. But land value not going up from 2006 to 2021 is hard to believe. The gain will be the same whether it is on the house or the land. Personally, I would make the land values more accurate. When you increase the land value, you decrease the house value at time of sale. Additionally, the expenses of sale can be allocated based on the percentage of land to house.  For example: If land value is 20% of the total sales prices, then 20% of sales expenses could go on the land and 80% on the house. The gain is still the gain however you break it up.

[gjgogol]

@AmyCIt is also interesting to note that when I checked out the current county property records (post 3/3/2021 sale), the county kept the land at the same value as when I originally purchased the home. Not sure whether or not this makes any difference from a tax reporting standpoint.

[gjgogol]

@AmyC  i attempted to calculate land sales and expenses as you suggested and my sales price actually went down.  here's why...i took the pct of land as it relates to my original total costs. i.e. 19%. Original total costs ($189K) included all assets, i.e. cost of home, land ($36K) and capital improvements.  Gross sales of property was $184K (which is obviously less than my total original costs of $189K). So I applied 19% to the $184K and it obviously resulted in a lower land sales price ($35,048 vs, $36K). What am I doing wrong?

[gjgogol]

@AmyC  one more question... You stated that land value not going up from 2006 to 2021 is hard to believe. You also stated that When you increase the land value, you decrease the house value at time of sale. Would it also not make any sense for the house value not to go up?

[DianeW777]

The answers to your questions are printed below so that you can see each one separately.

Question: Would it also not make any sense for the house value not to go up?

• Yes, if the property was well maintained it could certainly go up.  The point was to make sure you were using the most accurate method to determine your selling price for both land and building (and capital improvements).

Question: Gross sales of property was $184K (which is obviously less than my total original costs of $189K). So I applied 19% to the $184K and it obviously resulted in a lower land sales price ($35,048 vs, $36K). What am I doing wrong?

• You are not doing anything wrong in the way you should calculate the land selling price (19% x $184,000 = $34,960). The Land has no depreciation so there is nothing to recapture on the land.
• You will have an overall gain because you have not yet accounted for the depreciation for the rental period.  The depreciation will be recaptured up to the amount of gain on the sale.  Depreciation is considered as allowed or allowable so even if you never used depreciation expense on the rental building the IRS says you have. 
  • Building sale: Selling price - selling expenses - cost - depreciation = Net gain  
    • Based on your figures there is roughly $50,000 +/- depreciation that would have been expensed on your returns during the rental period.

Question: I wasn't sure how I am to handle the amortized/depreciated refinance fees.

• Do nothing. These were already handled on the 2020 tax return. You said they were expensed in 2020 when the property was taken out of service.

@gjgogol

[gjgogol]

@DianeW777  i really appreciate your help and patience.

I was reacting to @AmyC  who I believed suggested/implied that it is unrealistic that the land decreased in value from 2006 to 2021 and a better it would be more realistic if I showed land increasing in value. And then she went on to explain that the land increases and therefore the house value would decrease (keeping total gross sales at $184K). But if I increase land value and decrease house value, then it also shouldn't make sense that the house value decreases from 2006 to 2021 (unless I misunderstood her point).

You stated Building sale: Selling price - selling expenses - cost - depreciation = Net gain...shouldn't depreciation be added (Selling price - selling expenses - cost + depreciation = Net gain)?

[ColeenD3]

You said, "You stated Building sale: Selling price - selling expenses - cost - depreciation = Net gain...shouldn't depreciation be added (Selling price - selling expenses - cost + depreciation = Net gain)?"

Yes, you are correct. Basis adjustments are added to the cost.

Cost plus sales expenses, minus depreciation gives you the adjusted basis. That is contrasted to the sales price.

As far as land goes, there is no concrete basis for calculating what increased in price over the years and what decreased. It can't hurt to have the same percentage you gave to the land at the purchase be the same percentage at sale unless you have proof that one increased or declined over the years. 

[gjgogol]

@ColeenD3  As far as land goes, there is no concrete basis for calculating what increased in price over the years and what decreased. It can't hurt to have the same percentage you gave to the land at the purchase be the same percentage at sale unless you have proof that one increased or declined over the years. 

I originally purchased the property for $174K (Land = $36K; House=$138K) and added $43K worth of improvements. I recently sold it for $184K (2021).  I now have a total of 7 depreciable assets on Form 4562. What percentage do I use to allocate the sales price to the land?  If I determine the percentages by dividing each asset value by the total asset value, it ends up DECREASING the value of the land going from $36K (2006 purchase price) down to $35K (2021 sales price). Is that OK?

[ColeenD3]

Yes, that is okay. The assets had a specific price that can't be ignored.

[gjgogol]

@ColeenD3  great thanks!  The reason for the question is that there was an earlier discussion and an expert stated (paraphrasing) that it would be odd that land would lose value, thus my question.

[ColeenD3]

Yes. I read that and normally I would agree, but you can't argue with an absolute dollar amount that you paid for your assets.