Sale of rental property following demolition

[Deb3805]

I had a multi-unit rental property that I purchased over 25 years ago.  At least ten years ago it fell into disrepair and I gave up trying to rent it out.  It's basically been sitting empty for the last ten years.  I've been paying the property taxes and that's it.  Since it technically wasn't "available to rent" I haven't even listed it on my tax return, nor have I deducted any of those taxes I've been paying.

In 2024 I paid over $40k to have the unit demolished and sold the land for $1.  I know I can add the demo costs to the original land basis.  But can I include the property taxes I've been paying these last ten years?

[DianeW777]

No, you cannot include the property taxes you have been paying the last ten years because the property was not an active rental. The multi-unit rental property has been out of service, which is automatically considered converted to personal use for a period of 10 years because it's been sitting empty without making it available for rent.

You can add the $40,000 paid to demolish it as a part of your cost basis. Add that to the original cost and any capital improvements in the early years. Next find or calculate all depreciation allowed prior to you taking it out of service. Next you will report a sale of business property using the steps below.

Sale of Business Property:

1. Income and Expenses at the top
2. Scroll down to Other Business Situations
   • For TurboTax Desktop: Business Income and Expenses > Less Common Business Situations
3. Select Sale of Business Property
4. Select Sales of business or rental property that you haven't already reported.
5. Answer 'Yes' to Do all of the following apply...?
6. Enter your sales information:
   1. Description of the Property (Machine Type)
   2. Sales Price/Sales Expenses 
   3. Date acquired and date sold
   4. Cost
   5. Depreciation

NOTE: If the land was sold to a relative, the loss is not allowed to be used. If the land was sold to an individual who was not related to you, then the loss will be allowed.

[Deb3805]

Thanks for the quick reply!  I did not sell to a relative so that means it’s a long term capital loss, right?  Does that mean I can only offset the loss against capital gains?

[PatriciaV]

Yes, capital losses offset capital gains. Plus, you may deduct up to $3,000 of capital losses each year. Any excess loss is carried over to future years. You are required to take the allowed amount of capital losses each year until they are used up. TurboTax makes this calculation for you and reports the necessary loss on Schedule D.

Per IRS Tax Topic 409: "If your capital losses exceed your capital gains, the amount of the excess loss that you can claim on line 13 of Form 1040 to lower your income is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss shown on line 16 of the Form 1040, Schedule D (PDF), Capital Gains and Losses."

Read more here: What is a capital loss carryover?

[Deb3805]

It turns out you can only report capital gains using the path you provided.  After entering all the information I get this message:  Your sale did not result in a gain.  Report here only sales of property you made a profit on.  We'll remove this sale now.

When I went to the next step it prompted me to put in the same information if I had a loss.  I did that, but TT didn't clasify it as a capital loss, but rather an ordinary loss, fully deductible for 2024.  

Does this sound right?

[Deb3805]

It turns out you can only report capital gains using the path you provided.  After entering all the information I get this message:  Your sale did not result in a gain.  Report here only sales of property you made a profit on.  We'll remove this sale now.

When I went to the next step it prompted me to put in the same information if I had a loss.  I did that, but TT didn't clasify it as a capital loss, but rather an ordinary loss, fully deductible for 2024.  

Does this sound right?

[PatriciaV]

No, this should be a capital loss. Enter under Investment Sales >> Other (no broker, enter yourself). The result should be a Long-Term capital loss, as described previously.

See: Where do I enter a capital gain or loss?

[Deb3805]

Your suggestion is a completely different path than that suggested by DianeW777.  If I enter the transaction under Sale of Business Property (as Diane suggested) it asks for the original basis, improvements, and depreciation taken.  The results land on Form 4797 as a Sale or Exchange of Property Used in a Trade or Business.  If I go the other route as an Investment Sale, it doesn't ask for improvements or depreciation.

I should probably clarify, I have been retired for several years and spend most of my time maintaining numerous rental properties, all of which I classify as QBI.  I'm thinking this may allow me to report the transaction on Form 4797 since my main business is rental properties?

[DianeW777 · Accepted solution]

The sale should be shown on Form 4797 because that is where it belongs due to the rental use of the multi-unit. Follow the steps provided earlier so that your sale falls to the 4797 first. From there it could land on Schedule D or directly on Form 1040, depending on gain and/or loss. Posted below for your convenience.

Sale of Business Property:

1. Income and Expenses at the top
2. Scroll down to Other Business Situations
   • For TurboTax Desktop: Business Income and Expenses > Less Common Business Situations
3. Select Sale of Business Property
4. Select Sales of business or rental property that you haven't already reported.
5. Answer 'Yes' to Do all of the following apply...?
6. Enter your sales information:
   1. Description of the Property (Machine Type)
   2. Sales Price/Sales Expenses 
   3. Date acquired and date sold
   4. Cost
   5. Depreciation

@Deb3805