Sale of condo that was converted to a rental

[tenorman12]

I purchased a condo in 1982 and lived there as my main residence until 1995, when I got married and moved into my wife's home.  We converted the condo into a rental in 1998 and sold it in 2022 for a profit.  During the rental period it was used 100% of the time as a rental.   I've been reporting the rental all along in Schedule E.  I think I answered all the right questions in Turbo Tax for this sale, but I'm a little unsure about a few things:

- Since this personal asset was converted to a business in 1998, it is correct for the sale to end up on form 4797 (as a business sale) ? 

- In the "Sales Information" section for the condo, there are entries for Asset Sales Price (Business Portion) and expense, as well as land sales/expenses.  I have the asset/land broken out by the proper percentage of the total sales price, but I'm wondering about the "Business Portion" aspect.  The asset was used 100% of time as a rental  from 1998 to 2022, but it was my residence from 1982 to 1995.  Do I have to calculate the percentage of time it was used as a business (from 1982 to 2022) and adjust the sales price/expenses here, or will Turbo Tax figure all that out since it knows I bought in 1982 and placed into service in 1998?  In other words, do I put the full sales price or a prorated price here?

- Will Turbo Tax figure out the property improvements on it's own based on the Depreciation and Amortization data it has, or do I need to overtly account for that somewhere?

I've looked at various posts that are similar but have not been able to figure things out (confidently) for my particular situation.  

[MarilynG1]

Yes, you are reporting the Sale of a Business Asset (that you claimed depreciation on), so Form 4797 is appropriate.

Don't worry about the Business Portion aspect; it was 100% Business when you began renting it.  Put the Full Sales Price, and your Cost Basis (remaining undepreciated basis, plus Sales Expenses, plus any Improvements that you were not currently depreciating as assets). 

Use your Form 4562 to see Accumulated Depreciation taken.

However, if you do have Rental Assets you were depreciating, you need to report them as Sold also, so you can be done with Schedule E.  You can use a Sales Price equal to their Undepreciated Basis for a net gain/loss of $0. (Again, use Form 4562 for reference).  

You will need to allocate a portion of the Sales Price to each of these assets to close them out. 

@tenorman12 

[tenorman12]

Thanks for the answers, especially about selling the assets on Schedule E.  With regard to selling those assets, they covered all the improvements to the property, all of which were being depreciated.  

I'm a bit unclear about the Sale Price for each asset on Schedule E, listing the original cost as the Undepreciated Basis.   Is the Undepreciated Basis the same as the original sales price?  The "Cost" and "Depreciable Basis" appear to be the same thing on form 4562.  I may be missing the point here.

It seems odd to list the sales price of a dishwasher (purchased in 2006 for $665) to be the original price of the appliance.  If I put that into Turbo Tax, it comes out as a gain of $665.  Would the IRS expect a more realistic price since it sold in 2022?    This ties into your statement "You will need to allocate a portion of the Sales Price to each of these assets to close them out."   Would I reduce the actual condo sales price by the $665 to "allocate" this amount?  I'm obviously a bit confused here.  Could you elaborate a bit more?

Thanks.

[AnnetteB6]

Here's an example that may help to explain this a bit.  For your dishwasher that was purchased in 2006 for $665, by 2022 it should have been fully depreciated if it had been entered as 7-year property.  Therefore, it would not have any 'depreciable basis' left.  The remaining basis is $0 since it was fully depreciated by 2022.  So for the dishwasher, you would enter a sales price of $0.  This would result in no gain or loss, but the asset would be removed from the Schedule E since it was sold.  Nothing with regard to the dishwasher would need to be allocated from the sale of the property.

However, for another example (with made up numbers not based on actual depreciation) suppose you purchased and placed in service a refrigerator in 2021 that cost $1000.  In 2021, you took $200 of depreciation for the refrigerator which left $800 in depreciable basis.  Then based on when the property was sold, another $100 was depreciated in 2022 leaving $700 in depreciable basis.  Enter $700 as the sales price for the refrigerator (this is the undepreciated basis - the amount that has not been depreciated yet).  There is no gain or loss on the sale, but that $700 is allocated as part of the sale price of the property itself.  It is subtracted from the sale proceeds.

@tenorman12 

[tenorman12]

Those two examples clears things up, thanks!   I now understand what "undepreciated basis" means.  

One clarification, if you don't mind.  Regarding your statement "...but that $700 is allocated as part of the sale price of the property itself.  It is subtracted from the sale proceeds.".  So I have to subtract the $700 from the actual condo sales price (when I enter the condo sales price); Turbo Tax will not automatically subtract that for me somewhere in its later calculations?  If I subtract that myself from the sale price of the condo,  what is the best way to document that, so if there is an audit later it's clear how I modified the sales price?

This community discussion resource is very helpful.

[RobertB4444]

You'll break out pieces of the sale price for each of those assets.  $700 as in that example and if there was an oven a piece for that too and so on.  That way the total sale of the assets will add up to the amount that you received.  TurboTax can't do any of those calculations for you, you have to do them manually.  You do want to save all the records for the math that you have done but this won't raise any red flags for the IRS since the bottom line will match what was reported to them.

@tenorman12 

[tenorman12]

Ok, I'm all set now.  Thanks for all the explanations.