Rental Property/Primary Residence Sale

[MsMarlene]

We lived in our home for two of the last five years.

Prior to that it was a rental property for three years.

It was sold while it was our primary home, so no rental business has been entered into TT for the last two years.

Since it's been our primary residence, I'm having a hard time knowing how to correctly enter this into TT.

Could someone give me the steps?

[Carl]

You'll report the sale under the Personal Income tab, Less Common Income section, Sale of Home (Gain or Loss).

Understand that since it was your primary residence for the "last" two years you owned it, not all of your gain will be tax exempt. But a good portion of it will be. You will "really" need to pay attention to the small print as you work this through so that you make the correct selections.

Also, you will need the IRS Form 4562's from the last year you reported this property as a rental. There are two 4562's for the property and you will need them both. They print in landscape format and one is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Depreciation Report". Without both of those forms from the last year you reported rental income for the property on SCH E, you will not be able to "correctly" report this sale.

Also, as you work this through there is one screen that will have a high probability of confusing you.  The screen asks, 'Did you use this home for anything other than your primary home?" Then the small print under that can lead to confusion. particularly the "note" can confuse you. TO clarify, you did "NOT" use this home for anything ***AFTER*** it was no longer your primary residence, because you no longer owned the home after it was your primary residence. So on this screen you will select YES to indicate that you *DID* use the home for other than your primary residence for a period of time ***AFTER*** 2008.

That period of time after 2008 or after you purchased it (whichever is alter) is "unqualified use". So when asked for the number of days of unqualified use, your day count will start on the latter of:

- Jan 1 2009 if you purchased the property *before* that date or

- The day you closed on the sale if you purchased the property after Jan 1 2009.

[MsMarlene]

Thank you for the extremely helpful detailed reply.

Just to clarify: I will have to pay back depreciation and a portion of the gain?

[Carl]

Recaptured depreciation is taxable no matter what you do. There is no way to get out of that. Even if you qualify to exclude the entire gain from taxation (and you won't), 100% of the recaptured depreciation will be taxed in the tax year of the sale.

As to what portion of your gain will be excluded, there's no way to know until you enter all the data and let the program "do the math". Since at this time the IRS has not yet released the electronic versions of the 4562 depreciation reports, the program may not be able to do the math correctly at this time. I can't be sure since I don't know "for a fact" that reporting the sale where I told you to report it, matters if the 4562 is in the program or not. I would expect it not to matter at this point. But I wouldn't be willing to place a bet on it.

[jeffb1818]

Great info on what t put into TT when selling rental property converted to personal residence.  I made my rental property my primary residence 2 years ago.  I deleted the asset from Schedule E because there was no income and no depreciation to enter - was it a mistake to delete the asset, or should I have entered $00.00 when asked for data?