Long-term gain wrongly classified as short-term

[JeffDwork]

Using TT Deluxe 2017. Sold rental real estate held since 1992. Split sale price between building and land. Gain on building correctly classified as long-term capital gain, but gain on land classified as short-term.  Has any else seen this?

What forms should I override to get TT to give me the right results?

I'm waiting to speak to a support supervisor - the first support person wanted me to upgrade to Premier, did not acknowledge this as a bug.

Thanks, Jeff

[Carl]

Did you report the sale by working it through the Rental & Royalty Income (SCH E) section of the program? I ask, because if you did then it's practically impossible for the sale to be split classified as you are claiming/experiencing. Maybe the below will help.

• 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  2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" 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 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. 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 2017" 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.

[JeffDwork · Accepted solution]

I found the problem. It is a bug but should not affect a correct return.

If in the asset worksheet for rental real estate the cost of land (line 7) is $0 and then, when the property is sold, some portion of the sales price is allocated to the land, that gain will be classified as short-term, regardless of the time the property is held. Putting a correct, non-zero, land cost will make the gain appear correctly as long-term.

In my case, the property came as an inheritance through a trust. When the trust dissolved, the trustee only provided a cost basis for the building and other assets (heater, refrigerator, etc) - no land cost was specified. So I left it out. When I apportioned the sales price per the most recent county assessment, I triggered the bug. I put in a proper basis for the land and the problem disappeared.

Thanks,

Jeff

[Carl]

Glad you found the issue. Actually, it's not a bug per-se. In a majority of cases, you *have* to allocate a value to the land. Otherwise, you're telling the program you had no land. So if you sell something without an acquisition date/value the program can only work with the date provided, which would be the date of sale making it a short term gain. This will happen if you leave the "cost of land" box blank. But it doesn't happen if you put a zero in that box. I tested this on an 1120-S return, and am assuming it would be the same issue with a 1041.

[hardtimes]

Does not make any sense since BOTH were held LT. And would think they would fit into Deluxe- not premier, Did you ever hear from a supervisor?

[Carl]

Hear from a supervisor? Apparently, you're under the impression that I work for TurboTax. This is a public user-to-user forum and I'm just another user same as you. But I don't see a bug. I only see user error.

If you enter a value of 0 for the cost basis of the land, then you're telling the program you don't own any land. So if you then provide a sale price for land, as far as the program is concerned, you sold land you never owned. From the program's perspective it can only be a short term gain. Since the IRS says you have to have a value for the land, you can't have a land value of zero. While there are some exceptions to that, I can figure you don't qualify for such an exception since you didn't state you never owned or inherited land.

If you purchased the property, then a portion of what you paid was for land. If you inherited the property, then the value of the land was the FMV on the date the person you inherited it from, passed away.

I'm wondering if what you're calling the "structure" price included the land, or if the provider of that information you have, just forgot or for whatever reason didn't include the value of the land.

On the old HUD-1 closing statements there was no separation of land/structure values. One always had to refer to the property tax bill in order to figure the ratio of land to structure value, and then apply that ratio to the actual price paid.  From what I've seen of the so-called "new and better" closing statements, they're about as helpful with this stuff as matches are in a gasoline refinery.

[JeffDwork]

I "solved" the problem shortly after starting this thread. Specifying a land cost of $0 gives the correct (long-term gain) result. Leaving the land cost box empty results in the same gain but classified as short-term. I forgot to check the "solved" box until today.

In my particular case, the property came to my wife by inheritance via a trust which eventually dissolved. At the time of dissolution, the trustee provided only the cost basis for the building. The land cost was not specified and wasn't needed until she sold the property. We worked out the land cost by subtracting the building basis from the total value declared in her mother's estate tax return.

A zero cost basis for land would be possible if a real property had be acquired for free under the Homestead act and then passed down by gift during the lifetimes of each previous owner. Not a very common situation.