turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Event: Ask the Experts about your refund > RSVP NOW!
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Selling Rental Property - General Questions

Hi - my husband and I purchased a condo together in 2007. When we split up in 2013, I put the condo in my name and lived in it as a primary residence for 5 years. In 2018, I purchased a home and turned the condo into a rental unit. I am about to close on the condo next week and want to understand my tax implications. 

 

1. Primary residence, do I count the years I lived there as a primary residence from 2007 - 2013 when it was a joint property? Or just start from 2013 when I took ownership. 

 

2. Do I need to pay any taxes directly after the close? or can I just pay taxes at tax time? 

 

3. How much can I expect to pay in capital gains, and how can I minimize the taxes. 

 

4. How can depreciation that I have been paying help me minimize / or impact how much I owe. 

 

5. The condo basically operated at a loss until the end of 2021 and has been with no income since Jan. I spent around 20k in renovating before sale. Is there a way to write-off any of the reno costs? 

 

Thanks

SJ

 

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

7 Replies

Selling Rental Property - General Questions

This pub should answer many of your questions

 

https://www.irs.gov/pub/irs-pdf/p523.pdf

 

You will have some depreciation recapture when selling the home.

 

Taxes won't be due right after the sale.  But, you many need to make estimated tax payments.

https://www.irs.gov/pub/irs-prior/f1040es--2022.pdf

 

The renovation cost will be added to the basis and will reduce the amount of gain.

**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**
Carl
Level 15

Selling Rental Property - General Questions

1. Primary residence, do I count the years I lived there as a primary residence from 2007 - 2013 when it was a joint property? Or just start from 2013 when I took ownership.

When you took ownership But don't bother. You did not live in the property as your primary residence for the required 2 years of the last 5 years you owned it. So you don't qualify for any sort of capital gains exclusion.  Unless you have other extenuating circumstances that occurred you wouldn't qualify for any of the exceptions for a partial exemption either.

To be more precise, you are required to live in the property as your primary residence for at least 730 days of the last 1826 days you owned it, counting back from the closing date of the sale. The required 730 days do not have to be consecutive either.

 

2. Do I need to pay any taxes directly after the close? or can I just pay taxes at tax time?

That's your call. But to avoid any hassles and having to deal with underpayment penalties, I usually recommend you send the IRS as least 20% of your taxable gain. That will, for the most part, ensure you don't owe taxes at tax time. But the percentage you elect to go with depends on other factors such as what tax bracket the gain will bump you into, as well as any other taxes you pay already, such as the withholding tax on any W-2 income you may receive.

3. How much can I expect to pay in capital gains, and how can I minimize the taxes.

It depends on what tax bracket those gains bump you into. See https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022 for the 2022 tax bracket and rates.

4. How can depreciation that I have been paying help me minimize / or impact how much I owe.

When you sell the property, you are required to recapture all depreciation taken. If you didn't depreciate the property, you are still required to recapture the depreciation you should have taken. You will be taxed at the ordinary income tax rate on recaptured depreciation. Take note that recaptured depreciation is added to and therefore increases your overall AGI - which can change the tax bracket you fall into.

5. The condo basically operated at a loss until the end of 2021 and has been with no income since Jan.

I doubt you actually operated at a loss. But when it comes to taxes, it's common to show a loss "on paper" at tax filing time. Remember, the principle part of your mortgage payment is taxable income. But that's usually offset by the depreciation you're required to take. So "on paper" at tax time, it's common for rental property to show a loss.

If you were not at least actively trying to rent the property, then you should covert the property back to personal use with a conversion date of at least Jan 1, 2022 so as to stop depreciation.

I spent around 20k in renovating before sale. Is there a way to write-off any of the reno costs?

Your renovation cost are referred to as property improvements in IRS parlance. Those property improvements add to your cost basis in the property. If these improvements were completed after the last renter moved out, then assuming you convert the property to personal use, you do not enter them as assets on the SCH E since they were never placed in service as a rental asset. (Unless you were "in fact" actively trying to rent the property until you at least get s signed "contract to commit to purchase" from a buyer.

Be aware there's a lot of detail I'm not going into here, as I have limited information provided by you to work with.  But since this sale has not yet occurred and the details won't come into play until you actually start your 2022 tax return, all I'm doing is answering the questions asked to the best of my knowledge and ability without making any assumptions.

Selling Rental Property - General Questions

This is fantastic - thank you so much. 

 

For personal use, I did not have renters from Jan - June (sale date) 2022 and was using this time to renovate.  Can I convert the condo back to personal use from Jan - June 2022? And will that help my personal use date calculation?  I took ownership June 2013 and started renting June 2018-Dec 2021. 

 

Since I will also have my home, does converting the condo to personal use in 2022 for six months affect anything with my personal home? 

 

Thanks for the great answers, it gives me a good idea of what I need to look out for at tax time. 

 

SJ

Selling Rental Property - General Questions


@Carl wrote:

Remember, the principle part of your mortgage payment is taxable income.


I believe the above-quoted statement needs to be rephrased since it is incorrect as it stands.

Carl
Level 15

Selling Rental Property - General Questions

For personal use, I did not have renters from Jan - June (sale date) 2022 and was using this time to renovate. Can I convert the condo back to personal use from Jan - June 2022?

I think you worded your question wrong, and are asking if you can convert it back to a rental. If you converted it to personal use on your 2021 tax return after the last renter moved out, then leave well enough alone.  Otherwise, assuming you did not rent or attempt to rent the property in 2022, you have two choices.

1) Amend your 2021 tax return and convert the property to personal use with an effective conversion date of one day after the last renter moved out. This will stop depreciation on the date of conversion - meaning less depreciation to recapture on your 2022 tax return when you report the sale.  This also means you will not be reporting anything what-so-ever on your 2022 tax return on SCH E concerning this property.

2. Wait until you start your 2022 tax return and convert the property to personal use with a conversion date of Jan 1, 2022.  Absolutely nothing concerning your property improvements will be reported on the SCH E of your 2022 tax return either, since your property improvements would never be placed "in service" as a rental asset. This also means that any depreciation taken on the 2022 tax return would be minimal, if any at all. Finally, you would not be able to claim "any" rental expenses in the rental expenses section either.

And will that help my personal use date calculation?

Exactly what is it you need to "calculate" for personal use? You don't qualify for any capital gains tax exclusion on any gain realized from the sale.

I took ownership June 2013 and started renting June 2018-Dec 2021.

I don't see how that matters here, since you don't qualify for any capital gains tax exclusion.

Since I will also have my home, does converting the condo to personal use in 2022 for six months affect anything with my personal home?

No. The rental converted to personal use just becomes a 2nd home - not your primary residence. With either choice 1 or 2 above, you'll be reporting the sale in the "Sale of Business Property" section. That's where you'll deal with including the cost of your property improvements in your cost basis.

 

Now that I'm re-reading your original post, it seems to me your first matter right now, is you need to figure out your cost basis on the date you "took possession" of the ex's half of the property.  It depends on the laws of your state. I don't know if you took possession as part of a divorce decree/agreement, formal separation agreement, or whatever since you merely state you were "separated".  I don't know if you get a step-up in basis of the half you took possession of, or if you retain the original cost basis. I just don't know. Depends on the laws of your state I would think, when it comes to separation and/or divorce. Heck, maybe you were not married to the other owner at all? Lots of legal things to deal with there for which I would suggest you seek professional advice..... especially if your state taxes personal income.

Carl
Level 15

Selling Rental Property - General Questions

Remember, the principle part of your mortgage payment is taxable income.

Would be more accurate to say it's not a deductible rental expense. Only the interest is deductible as a rental expense.

Selling Rental Property - General Questions

@salmajuma - given the complexities of this situation, after reading through this thread, you may be best served to hire a local professional to do your taxes this one year.  The risk of getting it wrong, since it is a one-time event, is high.  

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies