Sale of Rental Home

[Kenn]

I sold a rental house at a gain in 2021. The tenants moved out 1/3/21 and escrow closed 2/1/21. I spent the time in between preparing the house for sale.

I have some starting questions:

1. If I answer "Number of days Rented" as only three, will that limit the expenses I incurred preparing home for sale?

2. Is it correct that I should "edit" EVERY Asset listed for that property, fully depreciated or not?

If so, do I need to allocate the sales price to each asset as if it was part of the sale? What if it was an appliance that was fully depreciated and long since replaced?

3. When going through that interview process it asks if "Special Handling Required". Should I say yes or no?  It was a rental but the Learn More only talks about home office issues. 

Thank you

Kenn

[Carl]

Be aware the home remains classified as a rental. Do not convert it to personal use, or things will get more complicated.

1. If I answer "Number of days Rented" as only three, will that limit the expenses I incurred preparing home for sale?

No. But if you claim any personal use days, that will definitely affect the expenses you are allowed to claim.

2. Is it correct that I should "edit" EVERY Asset listed for that property, fully depreciated or not?

If so, do I need to allocate the sales price to each asset as if it was part of the sale? What if it was an appliance that was fully depreciated and long since replaced?

yes, you have to show the sale/disposition of each and every asset listed. Understand that depreciation is not a permanent deduction. In the year you sell the property, you are required to recapture all depreciation taken and pay taxes on it. Recaptured depreciation will be taxed at the ordinary tax rate up to a maximum of 25%, instead of the potentially higher capital gains tax rate.

Two things about recaptured depreciation.

1) Recaptured depreciation is included in your AGI in the year of the sale.

2) Recaptured depreciation has the potential to bump that increased AGI into the next higher tax bracket.

3. When going through that interview process it asks if "Special Handling Required". Should I say yes or no? It was a rental but the Learn More only talks about home office issues.

If the entire property was 100% business use during the entire time it was classified as a rental, then special handling is "NOT" required. Select NO. (If you select YES, then you will not be prompted for sales information.)

The below guidance should be helpful with this. Do take note that expenses incurred after the last renter moved out, are not rental expenses unless the property was held out for rent after that renter moved out, and at least until the sales contract was signed.

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  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" 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 if it's zero. Then you MUST work through the "Sale of Property/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 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" 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.

[Kenn]

Thank you! I am working my way down the Assets list for this property. Many older items I answered "no' when asked if "sold with the home" and entered zero for sale price and zero for . Some assets, a kitchen remodel and recently purchased appliances, were however sold with the home. When assigning a value to those it looks, from your instructions above, I should put a value grater than original cost so it consistantly shows a gain on all items, correct? 

[Kenn]

P.S. The Kitchen Remodel was still being depreciated by the way

[Carl]

Many older items I answered "no' when asked if "sold with the home" and entered zero for sale price

The age of an item is irrelevant. By entering a sale price of $0, it just  means any recaptured depreciation on this items was treated as SEC1250 gain and was therefore taxed at the capital gains tax rate instead of the ordinary income rate.

If you 'In fact" did not sell the item, then you should have selected YES for that item on the special handling required screen, assuming one of the reasons on that screen actually applied. (removed from business for personal use, lost, destroyed, given away, etc.)

The Kitchen Remodel was still being depreciated by the way

Again, doesn't matter. If an asset is not fully depreciated, that means you have less to recapture on that asset.

[Kenn]

Thanks again. I notice switching to the "special handling" on some of the assets does not change the tax owed. I guess my last question (for the moment lol) is "what did I forget to ask?". I know that is very broad but if there are some finer points along this path you can suggest that would be great. For example, is there a potential advantage to indicating an asset was sold with the house and setting a value, or would that also have no effect? There were a number of questions like that asked in this process. It looks like I have found a way to get to the end but if a little more effort could generate a tax savings, I would like to know.

[Carl]

notice switching to the "special handling" on some of the assets does not change the tax owed.

 When you select YES for special handling, all that does is convert the asset to personal use and it stops depreciation. So it's no longer a business asset. It's a personal asset from that point on. If the asset was lost, stolen, destroyed, disposed of, etc. then any remaining depreciation can be claimed as an expense. But it's up to you to figure the remaining depreciation to be deducted as an expense.

If the asset was pulled from the business for personal use, then you can't deduct the remaining depreciation or recapture the taken depreciation until the year you actually dispose of the asset. How you dispose of it in a later year will determine if you recapture taken depreciation, or deduct remaining depreciation.

is there a potential advantage to indicating an asset was sold with the house and setting a value,

It keeps you from going to jail by reporting the "real" disposition of the asset. 🙂

[john-ct]

Only the rental (not sales) expenses are deducted from the rent and reported on Sch. E. 

What you spent on getting the property for sale is a sales expense, just like closing costs, and is reported  (I believe) on Form 8949 Sales And Dispositions of Capital Assets, and effectively increases your basis and reduces your capital gains.  The Turbo Tax interview should get you through this properly if you answer yes to : Did you dispose of this property this year?

[Kenn]

OK I will sort out assets that were retired long ago and ones that remained. For the remaining depreciation on a few of the items I would take that as an expense on Schedule E for that rental? A particular line you could suggest?

[john-ct]

If you have been using turbotax right along, it automatically keeps track of assets and depreciation, and enters the depreciation for each improvement  each year.  Whenever you entered a capital purchase or improvement  that required depreciation, TTax created an Asset Entry Worksheet which is automatically updated each year.  You can find it in Forms, or on your copy if you chose "...all calculation worksheets" when printing or saving to pdf.

This year you can only take 3 days depreciation (3/365), so if TTax doesn't have all these records stored for you, I would just lump all these old items together as "Improvements prior to ______(year).

[Kenn]

Thank you. I have been using TT all along and I am familiar with the Assets Worksheet. I have three assets that had not finished depreciating. I believe I can deduct the un-depreciated portion. If that is correct my question is where to enter that? A friend's tax preparer entered this on 4797, the boxes on line 2. This was subtracted off the gain on line 6. That sounds very logical to me. Is that the correct procedure? If so, TT is not entering this automatically so should I enter manually?

[DianeW777]

No manual entry is required. The depreciation remaining is actually the remaining cost of your assets that are being sold.  The Form 4797 is handling all of this on the sale of the assets.  There is no deduction for remaining depreciation on the tax return, instead it reduces taxable gain on the sale. You should not need any manual intervention for the return to be calculated correctly.

Please update here if you have further questions about remaining depreciation for assets that have been sold in the current year.

@Kenn

[john-ct]

First go to forms and make sure that there is not more than one copy of 4797.  If there is, combine/eliminate one, to give the most accurate info.  If there is only one copy and data is missing, then enter it manually.  One thing I've found the hard way is that for items that are automatically carried over and updated by TTax, you should skip associated interview questions.  Answering these questions makes the program think you are referring to a new or different asset  resulting in extra asset worksheets, 4797's, depreciation worksheets, etc., which then have to be culled out.   

[Kenn]

Thank you DianeW777

So far I have not been able to answer questions on the Asset Worksheet interview to bring that across to 4797. Can you suggest what I might be missing? Also where exactly will these amounts show up on 4797 so I can see that they came through. 

[JamesG1]

At the screen Your Property Assets, you should be able to click Edit to the right of each individual asset. 

At the screen Tell us more about this rental asset, select This items was sold, retired, stolen, destroyed, disposed of.......

Depending upon the nature of the asset, it could be reported on Part I, Part II or Part III of the IRS Form 4797.

@Kenn