Sold Rental house - how to enter both sale of house and sale of repaired roof on the house

[bwc58]

Scenario

- House rented out 10 years ago and depreciated based on initial value of about $300k. 

- Roof replaced 2 years ago and depreciated base on $9k cost (deductible part of the roof replacement).  So I have two depreciation tables with different depreciation amounts.

- Sold the house in 2022.   I entered all the sales data in the Home adjusted basis and the Home Sale Worksheet and it appeared to propagate correctly to 4797 and other forms .  I then realized I must also include the "sale" of the depreciated roof asset and pay tax on roof depreciation recapture. 

The first Turbotax question for disposition of the roof asset - Was this asset included in the sale of your main home? 

- Answering Yes leads to multiple follow-on questions, finally ending in asset sales price and expenses.

- Answering No allows me to just fill in a sales price and expenses, and I entered both as zero.  

However, a zero value on line 3 of the Home sale worksheet for the roof is red due an unspecified error.  It also appears that schedule D line 38 still only includes depreciation recapture for the house,  and ignores the roof depreciation. 

   Any suggestions on the most correct way to do this?

Should I split up the house sale total and enter a sales price for the roof, or continue to assume its part of the house where I already entered the sales info? 

[Carl]

Assuming the house was still classified as a rental when you sold it, report the sale in the SCH E section of the program.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[bwc58]

Thanks for the info; it matches the guidance I've already found.

The key point in your reply may be this sentence  "Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. " 

I initially entered zero gain for the roof, since I included all the gain in the house price.  However, this just won't work.  I'm going back to split it up and see if all the forms then populate correctly.    

[Carl]

I initially entered zero gain for the roof, since I included all the gain in the house price.

The problem with no showing a gain on each individual asset, is that the depreciation recapture on all assets will not be properly dealt with and therefore taxed incorrectly. Entering $0 for the sale price on the roof means that the depreciation recapture on that gets included in the gain on the structure and incorrectly taxed at the "ordinary" tax rate, instead of the capital gains tax rate.

I've actually worked through scenarios like that a few years ago just see for myself how the program handles it. It's just a matter of "following the numbers" on all the worksheets in the program. Bad part it, the program doesn't "catch" this error, because the error checking appears to only look for mathematical errors, and not for mistakes such as this. As far as the program seems to be concerned with, so long as the math is right, you're good. But if the numbers are wrong, yet still "add up", it doesn't catch anything.

If I recall correctly, it's the SCH D and/or 4797 that shows the "bottom line" on both recaptured depreciation, and gain/loss from the sale.

[bwc58]

I understand what you are saying, and I've found other areas where the numbers don't always carry forward properly.  I think some of the worksheet to worksheet links are only updated when you get a box that asks - where do you want to link to?  However, that link is not persistent and it really just copies the data over at that point in time.

For example - you fill out a "home adj basis" form and it calculates a value for the basis.  The form text says the value will be carried forward to line 6 of the Home Sale Wks. 

This seems to work the first time through data entry, but if you go back later and change the adjusted basis entries and it recalculates the basis, it does not appear to update line 6 of the Home Sale Wks.   Since I'm now adjusting the house basis so that it does not include the roof, and also adding the basis and sales info for the roof, I'm using these forms quite a bit.  I've managed to force it to populate correctly by playing with the forms and going back and forth between step by step and forms views. However, at this point I couldn't document a repeatable process.

[spartan33s]

Ok, looks like a I’ve done everything correctly with MY rental and roof.  However, the roof portion is showing in “Sale of Home (gain or loss)” under “Less Common Income.”  Correct?  or if not, what did I click wrong?  The numbers all are correct.

[Carl]

Are the numbers right on the form 4797?What about the SCH D? That's what really matters.

[spartan33s]

Seemingly.  Just seems like either it should be listed there, or not…

[Odorodo]

I have a similar situation.  My rental sold for 600000.  I determined the value of the land was 250000 and the house plus improvements was 350000.  I had a new roof installed in 2016 at a cost of 28680.  If I understand correctly, I now need to work backwards and determine the "sale price" of the roof (I used 28681 or a gain of $1).  Now I need to subtract 28681 from 350000 to determine the "sale price" of the house without the roof.  So then $350000-28681=$321319 becomes the "sale price" of the house without the roof?  Now Form 4797 shows two columns instead of one.  Property A is for the house without the roof and Property B is for the new roof only, which will have its own depreciation and gain calculated.  Is this even remotely correct?  

I also have two other improvements; added city water and installed new A/C.  I assume they would be handled the same way and further decrease the sale price of the house only (i.e. house without roof, without A/C and without city water) and listed separately.  

[Odorodo]

Apparently the monitor bot thought my math was a phone number in the entry above... I was trying to show $350000 - 28681 = $321319.

[KrisD15]

When you sell rental property, there are usually two types of income generated:

Depreciation Recapture

Capital Gains

All the assets need to be assigned "Adjusted Basis" 

Adjusted Basis is the original cost less depreciation. 

Land does not deprecate, so the original cost stays as the basis

You don't say when you purchased the property and for how much, but lets say 300,000.

Lets say the land was valued at 50,000.

Land does not depreciate, so the adjusted basis is still 50,000.

That leaves 250,000 for the building. 

Lets say you depreciated 75,000 that leaves an "Adjusted Basis" of 175,000 for the building. 

Did the roof cost 28,680? If yes, how much did it depreciate? Let's say 8,680 so the adjusted basis of the roof is 20,000.

If you had other assets added, (like a water hook-up) they would also have been added as assets and depreciated. 

Let's continue with only the ones you listed.

NOW you allocate the selling proceeds. You can do whatever you (and the IRS) think is fair, but it is usually easiest to allocate the remaining "Adjusted Basis" to the assets, so 20,000 to the roof. That takes it off the books and you don't have to deal with depreciation or capital gain FOR THAT ASSET. 

So 600,000 less 20,000 = 580,000.

41% of the sale going to land seems high, but say the land is worth 250,000.

Ok, what did YOU pay for the land? Whatever is profit on the land is Capital Gain. 

That leaves 330,000 to go towards the building

The adjusted basis of the building is now 175,000, and you sold for 330,000

That means the first 75,000 is depreciation recapture because you now "Pay Back" what was depreciated, because unlike many things that get old and loose value, real estate often increases in value. 

The remaining 80,000 is capital gain