Sale of Rental Property that was originally Primary Residence

[CADBURY4ALL]

My wife and I purchased a house in NJ in Feb 2007 for $407,000. It was our primary residence since then (Feb 2007) until May 2013, when we converted it to a rental property since we bought a new primary property in April 2013 (also in NJ). In May 2013, the FMV of the NJ property (now rental) had depreciated to $320,000. We had been renting the property from May 2013 until November 2021 when we sold the now-rental property for $515,000. 

I've received a 1099-S from the sale of the rental property and the house is listed as "Other property". Could someone please guide me step-by-step on how to mark the property as sold in TurboTax and how to report the capital gains on the property?

Highly appreciate your help on this. Thank you!!!

[ColeenD3]

You report the sale in the Rental section, in the same place you include your rental income. Most of the information is entered in the asset section. Make sure you indicate the sale in the screenshots below.

Full steps for entering rental property:

• The first entry for the sale is found during the set-up of the property: Tell us about your situation this year/Click Sold or disposed of property

Next, the asset section of expenses will already be checked: 

*Assets

*Sold rental property

Includes info on the property you sold or disposed of. Since we know this applies to you, we've already selected it.

• After you click on Asset, you will be asked about the purchase: Tell Us About This Rental Asset
• In the screen Tell Us More About This Rental Asset, you will indicate the sale the date of the sale and the date you began using it for business. You can see the screenshot in a previous answer.
• Next: Confirm Your Prior Depreciation
• Next: Special Handling Required?
• Next Home Sale?
• Next: Sales Information. This is where you will be asked about the sales price.

[CADBURY4ALL]

@ColeenD3 Thanks for responding to my questions. I do have couple of important follow-up questions.

1. Based on the steps you suggested, when I go into the Assets section for the property, it shows the cost basis as $320,000, which was the FMV of the house when we converted it from primary residence to rental property in 2013. However, for the sale of the property, the cost basis should be $407,000, which we paid when we bought the house originally in 2007. Isn't that right? If so, where do I enter the correct amount of $407,000 as the cost basis for the sale?

2. At the time of the sale, in addition to the sales expenses related to realtor and legal fees, we had a major expense in the amount of $25,600 for the installation of a new septic system. Where could I add these improvements that were required for the sale?

Note that the screenshots that you've included in your answer are different than how I'm seeing it in my TurboTax Premier Windows. Appreciate your help.

[DianeW777]

Enter the difference with the sales expenses.  This will reduce the gain by the difference in the actual cost versus the fair market value (FMV) that was used for depreciation. 

The improvements can be added as sales expense as well.  This will reflect the accurate gain or loss on the sale reporting it in the appropriate sections of your tax return without taking extra steps.  Keep all of your records with your tax return as your backup should you need them later.

The screenshots do look slightly different between TurboTax Online and TurboTax CD/Download, however they information requested is the same.

[CADBURY4ALL]

@DianeW777 @ColeenD3 Just for clarification please, the original purchase price of the property was $407,000 and the FMV in 2013 at the time of conversion to rental was $320,000. So, in the step where I need to enter the Asset Sales Price and Asset Sales Expense, are you telling me to enter the following?

Asset Sales Price (Business Portion Only): $515,000

Asset Sales Expense (Business Portion Only): $29,000 (legal/relator fees) + $25,000 (septic system installation) + $87,000 (difference between original purchase price minus FMV at the time of rental conversion)?

Could you please confirm if that's what I should do? Couldn't I simply modify the Cost Basis from $320,000 to $407,000 under the Asset information?

I highly appreciate all of you responding so quickly. Thanks a bunch.

[DianeW777]

Yes, that's what you should do.  Altering the cost basis of the asset will produce the wrong depreciation expense for 2021 and for all prior years. You do not want to do that.