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moana
Returning Member

Where do you enter capital improvement for sale of rental property that was converted from personal use?

Hi All:

 

I hope someone can help. 

 

In 2014 I converted my home to a rental property that I sold in 2018.

 

Before I converted the property to a rental I made building improvements. Where do I enter them.

 

I think I enter them under Sales Information ... Under Asset Sales Expenses ... since improvements were only for building. Am I right? It seems to populate right in Form 4797 Line 21: Cost or other basis plus expense of sale for building.

 

Any help greatly appreciated. 

 

Ed

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3 Replies
Carl
Level 15

Where do you enter capital improvement for sale of rental property that was converted from personal use?

All capital improvements are entered in the Assets/Depreciation section of Rental & Royalty Income (SCH E).

Those improvements should have been entered and included in 2014 when you originally converted the property to a rental. Not having done so means you did not depreciate them over the last 4-5 years the property was a rental. That's gonna cost you unfortunately.

Now if in 2014 when you converted the property to a rental, then at an absolute minimum the property itself is listed in the assets/depreciation section. So if you included your cost of those improvements in the cost of the property asset that's been listed there since 2014, you don't need to add anything and you're good to go reporting the sale.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2018". Select it. After you select the "I sold or otherwise disposed of this property in 2018" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2017" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

Anonymous
Not applicable

Where do you enter capital improvement for sale of rental property that was converted from personal use?

duplicate post

Carl
Level 15

Where do you enter capital improvement for sale of rental property that was converted from personal use?

In fact, there are three duplicates for a total of four posts asking the same question. Replies to all of them indicate that professional help is "required" to fix this very expensive mistake.  Apparently, it's not the answer they want to hear, so they keep reposting.

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