Sale of Primary Home which was used as vacation rental

[jarvfam01]

We broke ground on our retirement home in July 2014 and took possession in January 2015.  Since I did not plan to retire for several years, we opted to cover the cost of the house by renting it as a vacation rental through VRBO.  We rented in through VRBO from May 2015 until October 2018. In preparation for renting the property we completely outfitted the house with everything someone would need to while on vacation. It was our second home from November 2018 until the end of November 2020.  We moved into the home full time and classified it as our primary residence on December 1, 2020.  We sold the house in April 2024. On this basis we believe we meet the 2 of 5-year rule for classification of the house as our primary residence for tax purposes.  As I was looking through IRS Pub 523, I came across a section that addressed rental use of a home.  If I understand that section correctly, it appears that we have to "repay" the depreciation we claimed while we rented the property through VRBO (the total depreciation is about $30K).  Another item I recall reading in Pub 523 briefly mentioned something about items sold with the home. We spent about $11,300 to outfit the house in 2015. Do we have to include those costs in our calculation for capital gains? At this point we are unclear of we how to handle the depreciation and costs to outfit the house, as we do we have to complete the worksheets in Pub 523.  We can provide more financial information related to the building cost and sales price if needed.  Looking forward to your thoughts and opinion on how to move forward with this issue.

[RobertB4444 · Accepted solution]

You will have to reclaim the depreciation on the residence and the amount of depreciation that you took will be taxed as regular income.  The good news is that TurboTax is set up to handle this.

When you're ready scroll down in the wages and income section of TurboTax to 'Less Common Income' and click start next to 'Sale of Home'.  The wizard will ask a bunch of questions in order to properly set up the sale.  After you have entered the details about the sale of the house and the purchase of it the system will ask if you ever used the home for anything other than a residence.  You will answer 'yes' and enter the number of days that the home was a rental.  Then you will enter the total depreciation that you took on the home during that period and the software will do the rest.

The only other thing for you is those rental furnishings.  If you expensed those at the time that you were renting the house or depreciated them and then sold them (even as part of the home sale) then you have a taxable gain on the sale.

If they were depreciated or expensed and you included them as part of the sale of the house just add the total amount that you took for the expense to the total depreciation and you'll be all set.  If you sold them separately then you will need to enter the amount that you received as regular income in your return.

If you gave or threw them away because they were at the end of their useful life then you can forget about the furnishings.

@jarvfam01 

[jarvfam01]

Robert,

Thanks for the info and directions on how to use the TurboTax software to report the house sale and rental implications.  FYI, on a previous form a tax expert confirmed that we can include the sale of the adjacent property and barn as part of the sale of the primary residence (treat both sales as a single transaction) since they occurred within a few months of each other.  

We used TurboTax desktop version for our 2023 taxes. If we opt to use the option to have a TurboTax expert do our 2024 taxes, do you know how I transfer the necessary data to them?

[RobertB4444 · Accepted solution]

You're going to need to transfer last year's tax return into TurboTax online in order for them to be able to work with it.  

Here's how to transfer the file.

Then you can contact the full service expert and have them start on your 2024 return.

Good luck!

@jarvfam01