Confusion Entering Sale of Rental Property

[UG Marshall]

I am very confused on how to properly enter the sale of my rental property. We purchased a home in 2005, lived in it until 2011, then converted it to a rental. We sold it in August 2021. I completed all the rental sections, and was surprised Turbo Tax never asked me for information on the sale, after I told it the property had been sold. According to an answer on another thread, you need to select "edit" on the Your Property Assets screen to enter the information. I have several assets listed on that screen, but I'll return to that issue later. Clicking through, I get to a screen called "Special Handling Required?". I answered "No" to this screen even though the business use percentage questions made me think to answer yes, since I had converted to a rental during ownership. Another thread said to answer no here, so I did that to proceed, but wasn't sure if it's correct. This asset wasn't the sale of my main home, so that takes me to the Sales Information Screen. I'm confused about what to enter. My home sold for $180,000 and my total due on my closing statement was $110,434 which covered paying off the old loan, closing costs, and my pro-rated portion of the taxes to the seller. I assumed I would use these numbers for my Sales Price and Sales Expenses fields. The screen says to use divide these numbers based on fair market value. Since I did not receive a tax bill in 2021, I don't have the Village's usual breakdown to use shown on the tax bill, but there was a substantial Assessment Change done in 2021 and I have that form. The split calculates out as 12.1% for land and 87.9% for the improvement using this recent assessment so that's how I divided out the numbers. When I enter this in the dynamic Federal Refund calculated at the top swings from -$1,600 to +$2,175. I didn't think this could be right because I expected to pay capital gains on this sale and thought it would say I needed to pay in more. The land ratio back in 2011 was 26% of the total. Should I be using the same proportions as when I put it in service, or the new ones on the 2021 assessment? 

What's more puzzling is my original land value when I put the property in service in 2011 was $31,353 (fair market value) and now on the 2021 assessment it's $21,500. Several screens ahead I now get a Loss on This Asset's Land screen saying I have a loss of $22,936. My land is shown as less value in 2021, but the difference is only about $10k from 2011, so I don't know where this $22,936 is coming from. 

If all these steps are correct, I assume I have to do something with my other asset line items, which are a small amount of refinancing fees from 2011, and two appliances. If the above steps are correct, I have no idea what you would enter to zero those out. What would the sales price and sales expense fields be for $82 of refinancing fees, for instance? Screen shots below.

[PatriciaV]

Yes, this is a complicated situation with many moving parts.

1. You have not reported the sales expenses correctly. Only the closing costs are considered Selling Expenses. Paying off the mortgage is not a tax-related transaction (any loan interest you paid is reported under Rental Expenses). Also, the pro-rated property taxes are reported as Rental Expenses, and not part of the sale.

2. Revisit the "Special Handling Required" page and read any blue hyperlinks that may help you answer this question accurately. If you converted this from personal to rental use, special handling may be required. Likewise with the Business Use Percentage questions - the blue hyperlinks may be helpful.

3. Allocate the sales proceeds to the building and the land based on your Cost Basis for those assets, not the current fair market value (assessment). Unless you made significant improvements to the land, it's unlikely your basis has changed since you converted the property to rental use.

4. You have a choice on how to handle the sale of the remaining assets. You can either allocate the sale price to them as part of the entire sale, again based on Cost Basis after depreciation, or report them as disposed of without a sales price.

After you have made these changes, reviewed the entire Rental Property section again, and see how this sale affects your tax situation, if you still feel you need more help, please consider using TurboTax Live. This service allows a tax expert to review your entries, share your screen if necessary, and provides some confidence that you have reported this sale as best you can.

[UG Marshall]

Thank you for your thorough response. When I got to this point, I was indeed interested in TurboTax Live for the reason you mentioned, but I cannot find a way to upgrade from the download version of Premier that I use each year, to TurboTax Live. Maybe I'll ask that question on another thread. 

#1 & 3) I have changed my land/improvement proportions to match the percentages that I used when I put the rental into service in 2011. That and changing my costs to only the $11K I paid at closing caused the refund calculator to swing -$14,293 the other way. The Results screen now says I have a disposition gain of $67,687. All told I only had $42,000 profit on the sale of home from when I bought it, and I had $29K in depreciation over the ten years it was in service. Isn't the depreciation treated as ordinary income? I'm surprised the disposition, and hence the tax swing, is this large.  

#2) The hyperlink on the Special Handling Required screen for the business use percentage merely states that "If the business use percentage varied over the life of the asset, the program cannot automatically compute the sale information. While I agree it seems that converting the home from personal use to a rental would make this apply, other threads I read on this type of question stated that if the business use was 100% after converting to a rental, you would answer "no" to this screen. In any case, if I answer yes, I can't get any farther to input sale numbers, so I don't know what the alternative is.  

#4) How do you report separate assets as "disposed of" without a sales price? 

[MarilynG1]

If you have Rental Assets you have been depreciating, Edit them and choose 'Converted to personal use' to avoid having to determine a Sales Price.  Or, you can use a Sales Price of $0 for each asset.

You won't have to use the Sale of Business Property section in this case.

For a rental property sold for a 42K profit, plus 29K depreciation recapture, your 67K gain seems appropriate. 

Click this link for more info on Rental Property Sale Gain Calculation.