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Level 15

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Why did you take it out of service? There was no need to do that if it was not your primary residence for one single day after the last renter moved out, and before you sold it. Leave it in service and report it per the instructions below. No matter what you do, all prior year's deprecation is recaptured in the year you sell it, and you WILL pay tax on that recaptured depreciation. There's just no way around it.

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 ahve a selection on it for "I sold or otherwise disposed of this property in  2015". Select it. After you select the "I sold or otherwise disposed of this property in 2015" 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 it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report it's 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 our 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. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically when working through an asset you select the option for "I stopped using this asset in 2015" 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.


 


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Level 15

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Your remodeling costs are most likely property improvements. You'll enter them in the Sale of Assets/Deprecation section, and you will NOT place them in service. If you have no choice but to place them in service, then the in service date is the same date, or one day before you sold it.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are classified as startup costs, amortized as such and depreciated over time.

Startup Costs

Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions

Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exeed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.


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Hi Carl, I appreciate your answer but my main question is why is TT calculating depreciation on assets put into service in 2014 when I have 1/1/2016 as the date the rental came out of service to get ready to sell. it was really 12/31/2016 but TT won't let me use that date. According to an IRS publication, Depreciation should stop calculating once the rental is taken out of service for sell. I was on the phone with someone for TT for 45 minutes but they couldn't figure it out and then the line was disconnected....
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I am referring to additional depreciation for 2016. I understand I will pay back all of the depreciation for the prior years. I just shouldn't be accumulating additional depreciation. Again, thank you
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Level 15

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Right. Because TurboTax 2016 is for the current tax year. If you took it out of service on Dec 31 last year, that would have been reported on the 2015 tax return, since Dec 31 was in fact, in that tax year. One day doesn't make that big a difference anyway. In fact, the total diference is probably less than a dollar, if anything at all.
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Level 15

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If you had taken it out of service on your 2015 return, then reporting the sale would be a big PITA on your 2016 return, because you could not report it in the Rentals & ROyalties section then. You'd have to manually enter all that prior year deprecation elsewhere in the program, which would still have to be recaptured and taxed.
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Level 15

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So what if it captures deprecation in 2016? You pay tax on that money, any way you look at it.
For 2016, you "deduct" the depreciation initially, making it tax deferred,  then you "add it right back in" and pay taxes on it when reporting the sale.
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That's the crazy thing.  I would expect depreciation on an asset to be about $1 for just 1 day too and then I wouldn't care but it is calculating $385 for depreciation on a heater that I had $450 in depreciation for the entire year in 2015.  It makes no sense.....  :(  Oh and I care because I am about $700 away from selling it at a loss so this new depreciation is a big deal.  But again, thanks for your help, I'm sure I've annoyed you enough with this topic.
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Level 15

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My guess is you paid for the heater in 2015 and took the 50% special deprecation allowance on the heater in that year. That'll do it.
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Keep in mind too, that your sales expenses "might" zero out your gain when done reporting everything on all assets.
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