IMPORTANT: Question about reporting sale of rental property turned primary residence

[khopton]

• Bought condo 1998 for rental and rented until 2016.
• Converted to primary residence in 2016 and sold in 2022. 100% business use until it was 100% primary residence, no partial.
• The structure and some appliances were depreciated during rental, no 179 or special.
• Suspended passive activity losses that I need to deduct now.

I am told by one expert that in 2022 what I sold was a primary residence and thus I should complete the Sale of Main Home Worksheet to determine 121 exclusion, Form 8949 and Schedule D with Unrecaptured Section 1250 Gain Worksheet. No Form 4797 because I sold the property as a primary residence, not a rental property. Cannot reactivate Schedule E because the property is no longer a rental.

I am told in another response that I must file Form 4797 because I had past rental use and that I should file a Schedule E for the first time in 6 years, put zero days of rental and show the PALs there, carrying to Schedule 1. Also, the Sale of Main Home Worksheet to determine 121 exclusion, Form 8949 and Schedule D with Unrecaptured Section 1250 Gain Worksheet.

The only thing I can find on IRS.gov is in "Publication 523 (2022), Selling Your Home" which says "If you made separate gain/loss calculations for business and residence portions of your property, you MAY have to use Form 4797 to report the sale of the business or rental part." Since I NEVER had a portion of the home or property used for business while another portion was used for personal, I did not make separate calculations.

!! Nov. 16 is my deadline for filing and paying and I need to know what forms I should file to show this sale. Please help and please make sure to explain why the method is right. Thanks.

[Mike9241]

In Turbotax you use the home sale worksheet.  in addition to indicating the depreciation allowed or allowable while a rental you must indicate the period of non-qualified use. non-qualified use is the period it was a rental. for example, say you acquired the rental 1/1/1998 and converted it to residence on 1/1/2016.  the period of nonqualified use is 1/1/2009 to 12/31/2015 (the current law excludes nonqualified use prior to 2009) is 7 years. if occupied from that date until sold say on 12/31/2022 the period of qualified use is 7 years (not really relevant just to point out you meet the 2 out of 5 year occupancy rule). total ownership is 25 years. your home sale exclusion (HSE) is therefore prorated 18/25 of maximum exclusion. Before the HSE is applied, gain up to the depreciation allowed or allowable must be recapture. With proper entries Turbotax can properly report the sale at least in the desktop versions. If you are unsure of entries or took improper depreciation, then run to a pro. Make sure to inquire as to what info to bring. 

[tagteam]

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@khopton wrote:

I am told by one expert that in 2022 what I sold was a primary residence and thus I should complete the Sale of Main Home Worksheet to determine 121 exclusion, Form 8949 and Schedule D with Unrecaptured Section 1250 Gain Worksheet. No Form 4797 because I sold the property as a primary residence, not a rental property. Cannot reactivate Schedule E because the property is no longer a rental.

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You were told correctly by this expert (quoted above) and that is the proper procedure.

You wind up with an 8949, Schedule D and the 1250 worksheet but not a 4797 since the last use was as your principal residence.

Essentially, you have a disqualified period (the rental period) and unrecaptured Section 1250 gain.

[khopton]

Re: Mike 9241, "In Turbotax you use the home sale worksheet.  in addition to..."

Thanks for responding. I did that worksheet. I'm not having problems with the exclusion or the depreciation recapture. They are relevant to the question, but the core question is "What about Form 4797 and what about Schedule E?"

I think the "separate gain/loss calculations" thing seems important. ?

I did the Step-by-Step and it never got the passive activity losses counted. I tried making a Schedule E just for the PALs but I need to resolve the whole "What is the truly correct set of forms I should file" question before I start adding forms TurboTax didn't insert. Further, I don't want a return with form conflicts, like a Schedule 1 referencing a non-existent Sch. E or a Schedule E without the F4797 it sorta implies (I don't actually know if those examples are incompatible but you get the idea).

I have never sold a rental property before and I need someone to tell me whether to file E and 4797. Basically, are either of the methods I mentioned actually right and if so which? Or, if not, what to file?

Again, thanks for your help.

[khopton]

Thanks for the answer about the 4797, tagteam. Will it look weird for me to have a Schedule E with no 4797? Or is there a way I can get the Passive activity losses counted without Schedule 1 Line 10 referencing Schedule E for that number?

I appreciate your help.

[tagteam]

If you've been using the program since at least the year in which you stopped using the property as a rental, the suspended passive losses should be carried forward by the program.

Otherwise, I believe you can enter the suspended losses manually into the program.

[khopton]

re: tagteam

I have been using it but it doesn't work right. Lots of posts on here about that not working.

My question is all about 'what am I required to do in this situation?' with particular emphasis on when to avoid the 4797 and how the passive activity losses should appear on the return. 

I won't know if TurboTax is handling properly if I don't know what is proper. I need help with that.

Thanks again for responding.

[khopton]

What is the criteria that determine whether Form 4797 is required? IRS Pub 523 seems to condition the need for F4797 based on making separate gain/loss calculations for business and residence portions of your property, not just the history of rental use. If anyone who has EVER had a property rented in it's entirety is supposed to make separate gain/loss calculations for business and residence portions of your property then I am mistaken. Also, am I allowed to just file Schedule E in the year of sale with zero rental availability days? Does the IRS see that is fine?

Thanks for helping. Please chime in if you can shed some light.

[tagteam]

I'm not sure if the thread below will help but you might want to read through it and see for yourself.

https://ttlc.intuit.com/community/business-taxes/discussion/i-have-passive-activity-losses-from-prio...

Regardless, you need to enter this transaction as the sale of a home so that you get the 2-out-of-5 exclusion. You will be prompted to enter an amount for the accumulated depreciation as well as the time period for which the property was used as a rental. 

The primary issue now is that you need to enter the suspended losses and then ensure that those losses get released to offset other income. Unfortunately, the program does not make that an easy task when you have converted rental property to personal use in a distant tax year.

[tagteam]

@AmeliesUncle,

Could @khopton use Line 24z for this purpose (i.e., enter the previously suspended passive loss as an adjustment)?

[AmeliesUncle]

You could (or a negative number on line 8), but I would file the Schedule E (with no rental days).  It will be clearer to show what the deduction/loss is from, and I think it would even include the 8582 that shows that it is the passive losses being used.

[AmeliesUncle]

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@khopton wrote:

What is the criteria that determine whether Form 4797 is required? IRS Pub 523 seems to condition the need for F4797 based on making separate gain/loss calculations for business and residence portions of your property, not just the history of rental use. If anyone who has EVER had a property rented in it's entirety is supposed to make separate gain/loss calculations for business and residence portions of your property then I am mistaken. Also, am I allowed to just file Schedule E in the year of sale with zero rental availability days? Does the IRS see that is fine?

Thanks for helping. Please chime in if you can shed some light.

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For real estate, you report it all on one form.  In your case, Form 8949.

The IRS revised and completely messed up Publication 523 about ten years ago, so I don't even look at it anymore due to the numerous errors and misleading comments.  But I suspect that you might be looking at where it discusses that if you have a main home and then you have a separate building that is used for business/rental, in which case you would need to split things up between 8949 and 4797.  But that isn't your situation so it all goes on 8949.

[tagteam]

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@AmeliesUncle wrote:

You could (or a negative number on line 8), but I would file the Schedule E (with no rental days).  It will be clearer to show what the deduction/loss is from, and I think it would even include the 8582 that shows that it is the passive losses being used.

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Yes, that's a great idea (Schedule E and the 8582), but I don't think you can do it with TurboTax. In fact, I don't believe you can even override the lines you would need on the 8582 (not 100% certain).

I also think that TurboTax would delete the rental entry with zero rental days.

So this would require the use of Forms Mode and overrides on Schedule E and then printing out an 8582.

[AmeliesUncle]

When you set up the rental, it will ask about prior passive losses, so I think that should produce the 8582.

For the Schedule E, just leave the numbers blank, except for letting the passive losses flow.  You *MIGHT* need to say it was rented for 15 days, or the program might try to delete it.  And of course you need to indicate that the property was sold in a fully taxable transaction (it is in the introductory part of the rental section, where you enter the address, etc.).

[tagteam]

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@AmeliesUncle wrote:

....You *MIGHT* need to say it was rented for 15 days.......

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Yes, now that could work. 

EDIT: I just did a quick test and entering just 1 rental day will work in conjunction with entering the prior passive losses. An 8582 is generated and the forms look to be okay. Of course, the entries still need to be made in the Sale of Home section.