So getting back to my original question. I don't believe the simplified deduction is the method I should use and I think cap gains will need to be calculated. So is the approach that easy that I just add up all the depreciation that was taken for the house during the time the business was going on and pay the tax on that or do I need to fill out the worksheets in publication 523 figuring the amount of the sale of the house minus the original cost paid years ago. Or am I making too much out of this?
Is this a hypothetical?
If you use the simplified method, you do not need to recapture.
Otherwise, the accumulated depreciation is recaptured (i.e., taxed as ordinary income up to a cap of 25%).
Not hypothetical. My mother-in-law sold her house. She had one room in her home she used to do massages for a couple of years. She stopped in 2019. I'm not sure when she started it (and neither is she), but I have worked with her and her taxes since 2008 and I do have Form 8829 that shows me the depreciation that was taken up until 2019 when she stopped doing the massages. BTW thanks for the quick response. I was hoping to get this resolved in case we need to make an estimated payment by 9/15.
So, you simply need to enter the accumulated depreciation figure into the program.
It appears as if you're good to go.
Thanks for your help with the depreciation question. So, then for the sale of the home part of this question. Do I need the settlement sheet from the original purchase (which I don't think she has) for any reason or can I just put in that house was bought at $159,800 and then sold in June for $405,800 and since she is married, they are under the $500,000 limit.
Did the spouse use it as a primary residence for the last two out of five years leading up to the closing (i.e., does the spouse also qualify for the exclusion)?
See https://www.irs.gov/publications/p523#en_US_2023_publink10008938
You also should have some sort of documentation as to the cost basis of the house, whether that is a closing statement, or something similar thereto.
I do have a closing statement and a Form 1099-S for the sale in June
For the sale, but you need to know the cost basis.
If you have no closing statement (e.g., HUD-1 at the time), there should be a public record of the transaction.
We have been filling out Form 8829 and down in Part III Line 37 - Home's adjusted basis or FMV, we put in $159,800 and Line 38 - Value of land was $45,000. Line 39 Basis of building = $114,800. We have used those numbers since she started her massage business.
You have no documentation as to what she might have paid for the property?
She says she can't find the original purchase agreement (closing statement/1099-S. ) I think you mentioned that we could look it up through court house records. But I'm wondering if we have used that $159,800 for so many years on the Form 8829, couldn't we take that as the cost basis?
And does it further complicate things if we took a Residential Energy Credit in 2011? LOL This is a nightmare!
You need to document the cost basis before anything.
As you indicated, there are certainly records pertaining to the price when the sale and purchase (deed) was recorded years ago (transfer tax stamps, perhaps).
Ok. Thanks so much for your patience and your knowledge. I will see if I can pull the original sale information and proceed from there.
One more thing. I am in Turbo Tax 2023 doing a mock return to give me an idea of whether or not we need a 9/15 estimate. I am stuck on the question "Did you Use This Home for Anything Other Than Your Primary Home?
I'm thinking I need to say no here, because according to your note on that page it talks about rentals or vacation homes. Nothing about using a small percentage for a business. Is that the correct assumption on that?
If you need to enter an accumulated depreciation figure then you need to answer in the affirmative.
actually either yes or no will get me to the accumulated depreciation screen. I think I like the NO button because the YES button wants me to tell them how many days the house was used for other purposes and I'm sure she has no clue for that answer. LOL