Sale of primary home which was used as a rental for 10 months

[bayo]

I bought my primary home in 2012 for 200k. Lived in the house for 6 years - everyday till Dec  2018.  We moved to different house in Dec 2018. Home was vacant from Dec 8  to Jan 12 .Rented it from Jan 2019 to Nov 2019. Sold it in Nov 2019 for 310k.  My question is do I have to do all the reporting on this as a rental property, depreciation etc ?  Can I select this as sold my primary home ? if yes then where do I report the rental income and expenses (property tax, insurance, repairs from Jan 2019 to Nov 2019).  I am still yet to file my 2019 taxes by Oct 15 2020.  During the sale closing, the closing agent asked if I ever rented out the house. I said yes. So she said I will get a 1099-S from the Title company. I got that in mail in March 2020. So trying to figure out. Please advise

Update 1: I did not take any depreciation or any rental activity Sch E etc on the 2018 taxes. Nothing.

Update 2: My main question is that do I report this as Sale of Primary Residence OR Sale of Asset ?  My main worry is whether IRS will see this as a taxable capital gain of asset from Jan 2019 to Nov 2019 ? If so how do I even formulate what is the asset cost basis as of Jan 2019 ?  I am really hoping I can avoid the complications and  that I can just show this as sale of primary residence and all capital gains excluded because this was my first and only primary home and no other home sold ever in my life. And then just report all the rental income, no depreciation and be done with it.

[Critter-3]

Did you try to rent it in 2018 ?   Was it available to be rented ?  Did you file a Sch E and take depreciation in 2018?

[Anonymous]

Home was vacant from Dec 8, 2018 to Jan 12, 2019.  if you did not try to rent it out in 2018, I would ignore that year since there is nothing that needs changing.  you can not ignore 2019 unless it was rented to at less than fair market value. then special rules apply so postback.

in 2019 if you rented at fair market rent, you must report on schedule E your rental activities which would include depreciation. since your cost is less than the fair market value the depreciation is based on the cost less the portion allocable to land.  depreciation starts on the date when you actively tried to rent it which would normally be a date before the actual rental started.  

[bayo]

Nope. I did not take any depreciation etc No Schedule E etc.nothing to do with rental in 2018 taxes.  In January 2019 , I put it for rent and found a renter who moved in sometimes in Jan 2019. In early Nov 2019, I then sold it off.   Thank you for your time. Please advice.

[tagteam · Accepted solution]

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@Anonymous wrote:

in 2019 if you rented at fair market rent, you must report on schedule E your rental activities which would include depreciation.

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You are technically not supposed to depreciate property placed in service and disposed of in the same year.

See https://www.irs.gov/publications/p946#en_US_2019_publink1000107322

[Carl]

For starters, you *WILL* be reporting this sale from the SCH E section of the program, since the last occupant to move out was a paying tenant. The fact it sat empty between the time the last renter moved out, and the closing date of your sale, is totally irrelevant. The property remains classified as "Residential Rental Real Estate" unless you the owner lived in the propert for one single day for "ANY" personal pleasure use, or as your primary residence. Note that living in the property for a week or two to prepare it for sale is *NOT* personal pleasure use or personal use of "ANY" type.

*DO* *NOT* convert the property back to personal use. If you do, then you will lose a percentage of your capital gains exclusion under the "lived in 2 of last 5" rule.

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 have a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" 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 2019" 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.

[Anonymous]

the IRS publication certainly says that no depreciation if acquired and disposed of in the same year.    however, I believe that the publication does not speak the whole truth. I believe and tax professionals I have conferred with in other years say that rule doesn't apply to property depreciated using the mid-month convention. I know that when I put real property into TT acquired and disposed of in 2019, depreciation is calculated.  the same result was obtained when I used Drake Pro Software.   

the explanation I got from the pros was that REG 1.168(d)-1 only deals with half-year and mid-quarter property - not mid-month. 

basis 275000 acquired 1/12/2019 sold 11/30/2019  1/2 month for January and November + 9 months for Feb to Oct = 10 months. full year would be 10,000 10 months (10/12) would be 8333 which is what TT and Drake calculate.  the 4797 shows the depreciation also. 

[Critter-3]

Since this was a short term sale the cap gain and depreciation recapture are taxed exactly the same when an asset is placed in service and sold in the same tax year  ... so why bother entering in anything in the asset section ?  What a waste of time and effort IMHO.   

[tagteam]

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@Anonymous wrote:

....I know that when I put real property into TT acquired and disposed of in 2019, depreciation is calculated.  the same result was obtained when I used Drake Pro Software.   

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Interesting that you should mention Drake (see the link below).

http://kb.drakesoftware.com/Site/Browse/Depreciable-Property-Placed-in-Service-and-Sold-in-the-Same-Year

[Critter-3]

I have been using Drake for 18 years ... they are the best professional system IMHO. 

[Critter-3]

Of course when all else fails check the IRS pubs ... quote from pub 704:

Depreciable or Not Depreciable

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. You can't claim depreciation on property held for personal purposes. If you use property, such as a car, for both business or investment and personal purposes, you can depreciate only the business or investment use portion. Land is never depreciable, although buildings and certain land improvements may be.

You may depreciate property that meets all the following requirements:

1. It must be property you own.
2. It must be used in a business or income-producing activity.
3. It must have a determinable useful life.
4. It must be expected to last more than one year.
5. It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.

[Anonymous]

@Crittre3 - wrong. look at the date they acquired the residence.  it's a  long-term asset and they are entitled to max home sale exclusion except for depreciation recapture.  

[Critter-3 · Accepted solution]

As a rental it is short term however due to the personal use they should be reporting it as a sale of personal residence and not as a rental so they can exclude the allowed profits.    In the rental section they should skip the depreciation / asset section all together  and report no depreciation in the home sale section so they have nothing to recapture.

[bayo]

Based on all the replies, My main question is that do I report this as Sale of Primary Residence OR Sale of Asset ?  My main worry is whether IRS will see this as a taxable capital gain of asset from Jan 2019 to Nov 2019 ? If so how do I even formulate what is the asset cost basis as of Jan 2019 ?  I am really hoping I can avoid the complications and  that I can just show this as sale of primary residence and all capital gains excluded because this was my first and only primary home and no other home sold ever in my life. And then just report all the rental income in TT and be done with it. If a few experts concur on this, then I will do just that. I contacted a CPA and they had a very expensive fee to even answer this question. I just have a W-2 and dependents to go on the MFJ  form. As per CPA it will take 2 hours of consultation time to go over all the improvements done to the home in 6 years and they must prepare the taxes to even answer this question- So a thousand dollars fees for the taxes.  Please advise.

[Hal_Al · Accepted solution]

My answer is the same as Critter's: you can just show this as sale of your primary residence and the capital gain is excluded.  Then just report all the rental income in TT and be done with it. 

Even those who say it should be reported as an asset sale, agree the result will be the same.  But, it's more complicated in TT.