"Do any of these situation apply to this property?" at my first rental business with the business license

[nicepat]

Hi,

This is a little big confusing question.

My situation: I have rented out one property for 10 years, and just open a new business in 2023 Jan and switched its ownership to the new business name. And the same amount of income came to the business account after then. 

What should I do for this question  "Do any of these situations apply top this property?" in the TurboTax Business tab?

Currently I selected none, but should I select '2023 was the first year I rented this property' because of the new ownership?

I am asking because The Review shows an error "Schedule E worksheet Sec 179 Carryforward-Reg should not be entered, because this rental property is not a commercial property". I did not have any carryforward so entered 0. This asks the positive number.  Any help for this?

[KrisD15]

To clarify, 

what type of entity is the new business- partnership, S-Corp or something else? 

(NOTE an LLC must also be something else for tax classification, such as a Sole-Proprietorship or Partnership) 

If you are moving the rental from one type of tax reporting to another, and the rental was being reported on your personal 1040 Schedule E, first enter all expenses and income for 2023, then indicate that the rental was converted to personal use on your personal 1040. 

This will stop deprecation and close out your schedule E.

You will have Accumulated Depreciation on the building and any other assets that were entered. You may also have Section 179 deductions and possibly Bonus Depreciation. 

All this depreciation and deductions need to be recaptured. If the rental was sold, the depreciation recapture  is calculated  on the sales proceeds. Since this is not the case in your situation, you lower your adjusted basis to account for the recapture and enter as a new rental for the business at this lower basis.

Example, you purchased the building for 250,000 and land 20,000.     270,000 total

You claimed (or could have claimed) 50,000 depreciation.

Enter the rental as new with a basis of 20,000 land and 200,000 building.    220,000 total

When the property is eventually sold, you will need to adjust the gain (if any)  and depreciation recapture at that point. 

Example, the property with land is sold, after claiming an additional 10,000 depreciation, for 300,000.

That means you have a profit of 30,000 from what you originally paid. (300000-270,000)

Say you allocate 23,000 to land for a 3,000 profit which is capital gain because land does not depreciate, so there is no depreciation recapture on the land. 

You allocate the remaining  277,000 to the building. You originally paid 250,000 so that makes a 27,000 profit, however you took 60,000 depreciation total on the building, so all 27,000 is depreciation recapture. 

If you sell for 470,000 ( 200,000 profit) you could have 3,000 capital gain on the land, 60,000 Depreciation Recapture and 137,000 Capital Gain on the building.

Depreciation Recapture is taxed as Ordinary Income

Depreciation Recapture 

[nicepat]

It's LLC, and I do not plan or think "selling" option yet. I appreciate your comment.