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Reporting Sale of Rental Property
If you are filing by mail, and you elect to “print and file” when finished, be aware the program only prints those forms required for filing. So you should print it again electing to print E-V-E-R-Y-T-H-I-N-G, and keep that copy for your records for at least 7 years. You should also print everything when you e-file also. That way, should you ever be audited or have some other need for detailed information not included in the “print and file” copy, you will have it. If you don’t do this, and you are doing your taxes with the online version, or if using the desktop version and your computer dies, and find you need this detailed information, then there is flat out no way possible to get it. You’ll have no way to prove how you arrived at your figures and you WILL LOSE your case if it’s one where the IRS says you did it wrong. Note that for on-line users, TurboTax PERMANENTLY deletes your online tax file after 2 years of not using the online version to file your taxes..
These instructions assume that you DID NOT live in the rental property for one single day between the time the last renter moved out, and the time you sold it. Also, while you may have in the past, converted this property back and forth between your primary residence and rental property, it is assumed you did not live in the property for any period of time IT WAS A RENTAL. (If you lived in it while it was declared your residence, that time doesn’t count.)
Finally, before we start, if this property was your primary residence/main home for 730 days of the last 1826 days you owned it, thus qualifying for the “lived in 2 of last 5 years” capital gains tax exclusion, you cannot use these instructions, as you do not report this sale in the Rentals & Royalties section. You’ll report this sale in the “Sale Of Home (Gain or Loss)” section instead. It’s under the Wages & Income tab, all the way at the bottom in the Less Common Income section. If you qualify for the exclusion, then use the instructions at https://ttlc.intuit.com/questions/2615083
To determine if you qualify for the exclusion, for total days owned start counting from the closing date on the HUD-1 statement you received when you purchased the property. You will include the closing date on that HUD-1 as day 1. The closing date on the HUD-1 you received when you sold the property, does NOT count as a day you owned or occupied it.
For the number of days it was your primary residence/main home, the date you converted it to personal use is day 1 of your count. The date you converted it to rental does NOT count, and the date of closing on your HUD-1 statement you received when you sold the property does NOT count.
You will be reporting all rental income and expenses, weather you actually had a renter in the property or not on or after January 1st, 2014, as well as sales information. Unless you change it on your 2013 or 2014 tax return, even if the house has sat unoccupied since you filed your 2013 tax return, it is STILL rental property as far as the IRS is concerned.
Before you start following these instructions, you are HIGHLY ADVISED to read them through completely, all the way to the very last page. You may not understand many things on this initial read. But the intent is that as you work through them the 2nd time and are performing the tasks of these instructions, you’ll at least have somewhat of an idea what comes later should you have concerns like “well what about this?” or such as you work through this. So for your own sanity, read them through completely, FIRST.
Before you can get started entering data into the TurboTax 2014 program you first need to gather information and do some math. We’ll start with the HUD-1 statement which you received a copy of at the closing when you sold it.
On page 2 of the HUD-1 statement your deductible sales expenses start at line 703 and end at line 815. But pay attention to detail here. If you have the NEW HUD-1 form, and there's an amount on line 803, then you will not include the amounts on line 801 and 802. This is because line 803 is the sum of lines 801 and 802. NOTE: as the seller, you can only deduct those expenses which have an amount in the “Paid from seller’s funds at settlement” column. Add these numbers together and write down the answer, labeling this figure as “Deductible Sales Expenses”
Now, without entering any data or changing anything, we need to get some numbers out of the TurboTax 2014 program. I am assuming you have already started using the program and have therefore imported the data we need, from your .tax2013 file from last year, into the TurboTax 2014 program.
For TurboTax Premier Under Federal Wages select the Wages & Income tab, then the I’ll Choose What To Work On option. For TurboTax Home & Business, under the Business tab select the I’ll Choose What To Work On option.
Scroll down to Rental Properties & Royalties and elect to start/update that section.
Work through the next 3-4 screens “AS IF” you still own the property.
When you get to the Rental & Royalty Summary screen, elect to edit the rental property you sold in 2014.
Work the next 2 screens AS IF you still own the property. The 3rd screen is titled, “Do any of these situations apply to this property?”
On this screen, select the option for “I sold or disposed of this property in 2014” and select any other options that apply also. Then click Continue.
On the screen asking if the property was rented for all of 2014, if it was rental property between January 1st 2014 and the time you sold it, select YES even if you did not have a renter in it. (If you did not live in it for one single day in 2014, it was still rental property, weather it was actually rented or not.) Then Continue.
Continue working through the next screens AS IF you still own the property, until you come to a screen titled “Review Your <rental property name> Rental Summary”. It’s 7 screens later for me.
On the summary screen, you will work through all four items. Note that the 3rd item is titled “Sale of Property/Depreciation”. If it’s titled differently, then you did NOT select the “I sold or disposed of this property in 2014” where you should have, as outlined earlier in this post.
When you have completed the first two items on this screen, click FILE then SAVE to save where you are now in the TT program. Then elect to edit/update “Sale of Property/Depreciation”
On the “Your Property Assets” screen, you will at a minimum have one item, which will be the actual property itself. Elect to review this item. The screen should be titled “Review Information”.
On the Review Information screen write down the figures for Cost, Land, and Prior Depreciation.
Once you have the above figures written down and labeled, click the BACK button.
At this point, we need to do some math. The “Cost” you wrote down is the full price you paid for the rental property, including the land. The “Land” figure you wrote down is what portion of the “Cost” figure was allocated to the land. We need to know what percentage of that “Cost” is for land. Here’s the math equation to get that percentage. LAND divided by COST. I’m going to plug in some imaginary figures to ensure you understand this.
COST: $50,000 (This is what I paid for the entire rental structure)
LAND:$10,000 (This is how much of the above $50,000 was used to pay for the land only)
10000 divided by 50000 equals .2
I move the decimal point two places to the right for 20 and that tells me that 20% of the $50,000 paid for the land. So now write down “Land Cost – 20%” (You will need this figure later)
Now back to the TurboTax 2014 program for more information.
You should be looking at the screen titled “Your Property Assets”. Do you have anything other than the actual property itself listed there? If, during the period you owned this property you did anything like put a new roof on, or replace the Central Air unit, you’ll see it listed here, assuming it was correctly reported on your taxes in the past. If so, we need your cost and prior depreciation for EACH AND EVERY ONE.
Elect to Edit the next one, write down the cost of that improvement and the prior depreciation already taken and label it for the improvement it is. Then click the BACK button and do the same for the next item in the list on the “Your Property Assets” screen.
Now, replace my imaginary figures with your figures and lets do some more math.
Sales Price: $100,000 (What I sold the rental property for)
Sales Price times Land Cost Percentage = what I sold the land for
$100,000 X .2 equals $20,000
Sales Price minus what I sold the land for equals what I sold the rental structure for
$100,000 -- $20,000 = $80,000
Rental Structure Sales Price = $80,000
Land Sales Price = $20,000
If you have other property improvement assets that you wrote down the cost of, here’s where it gets tricky, so PAY ATTENTION. You must now allocate portions of your “Rental Structure Sales Price” ($80,000 in this example) to each asset that you also sold as “a part of” the sale of this rental property. (The sale price of the land does not change, just because you added value to the rental structure with property improvements)
Now, so that you better understand and comprehend the reasoning behind my asset sales price allocations, let’s do a little bit of history on my imaginary rental property here.
I purchased the property in 2000 for $50,000
In 2003 the roof was in such bad shape, I had it re-shingled at a cost of $5,000
When I did my taxes in 2003 I added this asset to my rental property on my 2003 tax return.
In 2008 the Central A/C bit the dust and I replaced it for $5,000
When I did my taxes in 2008 I added this asset to my rental property on my 2008 tax return.
My total investment in this property is now $60,000 (this figure is referred to as my “adjusted cost”)
Now, on my 2014 tax return, I have a total of three assets listed for this rental property.
The rental property itself which I purchased for $50,000 (with $10K allocated to the land)
The new roof which I purchased for $5,000
The New A/C which I purchased for $5,000.
I sold this house in 2014 for $100,000 which, per my figures done earlier, the rental structure sold for $80,000 and the land sold for $20,000.
Now I need to allocate some of that $80,000 rental structure sales price, to the roof and the A/C assets. Since I sold the entire property for a gain, I “MUST” show a gain on each and every asset. (Even if it’s only a $1 gain on the A/C and a $1 gain on the roof) The reasons for this are explained in the Q&A section at the end of this document. For now, just accept my claims at face value please.
So here’s how I’m going to allocate my sales price, ensuring that everything adds up to EXACTLY $100,000 (the price I sold the entire property for)
Asset I Paid I sold it for
House $40,000 $68,000
Land $10,000 $20,000
Roof $5,000 $6,000
A/C $5,000 $6,000
Totals $60,000 $100,000
With the above you can see I have a “raw” taxable gain of $40,000 I haven’t deducted sales expenses yet, and I’m not worried about it because the TurboTax 2014 program takes care of that for me. I also haven’t figured in reclaimed depreciation. But again, I’m not worried about it because the TurboTax 2014 program will do that for me.
So in my chart above, replace my imaginary figures with your actual figures you’re going to use on your tax return. Now we’re ready to start entering data in the TurboTax 2014 program.
You’re already in the “Your Property Assets” screen, So elect to edit the 1st asset, which I am assuming is the actual rental property itself.
Click Continue and the screen is titled “Did you stop using this asset in 2014?”
On the “Disposition Information” screen enter the sale date as it appears on your HUD-1 closing statement. The “date acquired” field is already filled in. Leave it alone and click Continue.
On the “Special Handling Required?” screen, click NO. NOTE: for that first item listed (the business use percentage of this asset varied during the years it was used for business) if at sometime in the past you converted it from a rental to personal use, and then back to rental again, the period of time it was for personal use DOES NOT COUNT. Therefore, you will still select the NO button on this screen because you did not use it for personal use WHILE IT WAS A RENTAL. (If you have to click YES, then because of all the potential scenarios, and they are many, I can’t help you. You’ll just have to wing it and hope these instructions get back on track eventually.) On the “Home Sale” screen click NO. I am assuming this is NOT your primary residence at the time of sale. If it is, then you probably shouldn’t even be in the Rentals& Royalties section to report this sale anyway.
Click No again, (this property is not your main home)
On the “Sales Information” screen, remember those figures I told you to write down earlier? If you’ve got multiple assets to report the sale of here for this rental property, that’s where the numbers you got in the above section come into play. So for the amount you’re allocating to the actual rental structure itself (Labeled “HOUSE” in my chart above) enter that figure in the “Asset Sales Price” field. Then enter your figure for the land in the “Land Sales Price” field.
Now, take your total sales expenses (which you already have from lines 703-815 on the HUD-1 closing statement) and multiply the total sales expenses by the “Land Cost Percentage” (remember? You wrote this percentage down earlier) to see how much of your sales expenses will be allocated to the land, and subtract that answer from the total sales expenses. Here’s the math.
TOTAL SALES COST times LAND COST PERCENTAGE equals SALES EXPENSES OF THE LAND
$3500 X .2 equals $700
So still on the Sales Information” screen, I’ll enter this data as follows:
Asset Sales Expenses: $2,800 ($3,500 - $700 = $2,800)
Land Sales Expenses: $700
After entering all the above data, click the Continue button.
On the “Personal Residence” screen, click NO. (If you need to click YES, you’re on your own from here. Don’t know if these instructions will fall apart on you, or what)
On the “Installment Sales” screen click NO, then click Continue and work through until you are returned to the “Your Property Assets” screen.
IF you have other assets, then you will elect to edit each one and enter the sales price you allocated for that asset. Make sure the “disposition date” or “sale date” you enter for each item, matches what’s on your HUD-1 closing statement. You wil NOT enter any sales expenses for these additional assets because you already entered your total sales expenses on the screen for the actual asset/land sales information. But you need to enter “something” in the sales expense box, so just enter a zero and press on. (Allocating sales expenses across your assets has no effect on your taxable gain. So there’s no need to make it any more complicated than it already is)
Once you have completed entering the sales information for all of this rental property’s assets click DONE and work on through to the end of the Rentals & Royalties section to finish it out.
Once you have completed your tax return and print it out for review, you should have a SCH D that shows all your numbers for the sale of this rental property and the property improvement assets you sold as a part of that property. Review everything in detail to confirm it is correct, and that you understand it.
If you are filing by mail, and you elect to “print and file”, be aware the program only prints those forms required for filing. So you should print it again electing to print E-V-E-R-Y-T-H-I-N-G, and keep that copy for your records for at least 7 years. That way, should you ever be audited or have some other need for detailed information not included in the “print and file” copy, you will have it. If you don’t do this, and you are doing your taxes with the online version, or if using the desktop version and your computer dies, and find you need this detailed information, then there is flat out no way possible to get it. You’ll have no way to prove how you arrived at your figures and you WILL LOSE your case if it’s one where the IRS says you did it wrong. Note that for on-line users, TurboTax PERMANENTLY deletes your online tax file after 2 years.
FAQ – Frequently Asked Questions
Q – I lived in this property for 2 of the last 5 years. So why am I still getting a capital gains tax? Isn’t that waived if you lived in the property for 2 of the last 5 years you owned it?
A – Yes, you are correct. But you need to count days. Not months, weeks or years. Also, the day of closing when you sold the property, does not count as one of those days. Basically, there are 1826 days in 5 years (365 times 5, plus 1 day for leap year). You must have lived in the property as your primary residence (not 2nd home) for at least 731 days of the last 1826 days prior to the closing date you sold it. If you’re even one day short on either number (you only owned it 1825 days maybe), then you don’t qualify for the capital gains exception.
Q – I only made a $40,000 gain on this sale. Why am I being taxed on a substantially higher amount?
A – While the land was not depreciated during the period you owned it, the rental structure and all property improvements you paid for(which added to the cost basis of the property) did depreciate during the period you owned it. When you sell the property, you are required to reclaim all that depreciation in the tax year you sell it. Since you didn’t pay taxes on the depreciation each year you owned it, you have to pay taxes on it now. So if you sold the house with a $40,000 gain, and had $10,000 of depreciation over the 10 years you owned it, you now have to reclaim that depreciated amount. It gets added to your “real” gain and you pay taxes on it in the tax year you sell it.
Q – I replaced the 10 year old central A/C in 2010 for $5,000. How on earth can I say I sold a 3 year old “now used” central A/C unit, for more than I paid for it?
A – You sold this property (which included the A/C unit) at a gain (profit). if you report that you sold one single asset of this property at a loss, it affects the taxable amount of the reclaimed depreciation on that asset. The IRS says you can’t do that if you’re selling at a gain (which you did sell at a gain, if you followed these instructions)
Q – Hey! If I amend my 2012 taxes to show I sold it in 2012, tax rates are lower and my tax liability is lower (or I get money back). Can I do that?
A. The IRS has a copy of your HUD-1 closing statement, which as the sale date on it. Nuff said.
Q. When working through my property assets, I see a Central A/C unit listed there, which I replaced years ago. I can’t allocate any sales price to it, since it’s no longer there. Since I need to show a gain on all assets, do I allocate some of my sales price to it? Otherwise, this is going to [removed] me up reporting this rental property sale. Can I just delete it from the “Your Property Assets” screen?
A. No and No. ABSOLUTELY NOT! If you just delete it you’ll find yourself in “tax hell” in 18-24 months. The IRS will want to know how you disposed of that asset. If you removed it for personal use, then all prior depreciation has to be reclaimed on the tax return for the year you removed it from service, and YOU WILL BE TAXED AND FINED for the late tax payment on that reclaimed depreciation. If you sold it, then you still have to reclaim the depreciation and pay taxes on it. However, there is a “legal loophole” way to fix this and keep the IRS off your back. This won’t matter if the old unit was fully depreciated or not. Here’s what you do.
As you work through that specific asset in the rental property section of the TurboTax program, you will indicate that it was “removed for personal use” on whatever date in 2014 you want to pick. (I would suggest a date that is well prior to the sale date on the HUD-1 closing statement). This will of course, reclaim all prior depreciation and it will be taxable on your 2014 taxes. But that’s okay “for now”. We’ll offset all or a large portion of that taxable reclaimed depreciation later (Keep reading to see how).
After you have completely finished everything in Rentals & Royalties and work through the rest of the income section, you’ll work through everything under the “Deductions& Credits” tab. As you work through Deductions & Credits you’ll come to the “Other Deductions & Credits” section under that tab. In that section there’s a sub-section for “Casualties & Thefts”. Here’s where you’ll report the loss of the old A/C unit, with a loss date of the day “after” you removed it from service in the rental for personal use, as a casualty (not a theft). Then the allowed portion of the FMV of that unit will be deducted from your reclaimed depreciation and you will only pay tax on the difference. (It will be negligible, but this keeps you legal)
In the future, if asked (you’ll never be asked) why it took 3 years to report it, the answer is simple. When you replaced it, you stored that old non-functioning unit in the utility room or shed located on the rental property. Therefore it was a “rental property asset” until you physically removed it from the property on whatever date you specified in 2014, on your 2014 tax return.
Note that this asset WILL REMAIN on your 2014 tax return. When you do your 2015 taxes, if that rental property is imported to the 2015 TT program, then you will “at that time” delete the entire rental property and all of its assets from your 2014 tax return.
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