Reporting Sale of Rental Property I Lived in 2 of Last 5 Years (2014 Tax Year Only)

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  If you sold this property for a profit and it was your primary residence for at least 2 of the last 5 years, you may qualify for the capital gains tax exclusion. This instruction will walk you through reporting this sale in the TurboTax program.

  These instructions do not take it into account, if you rented out part of your home while it was your primary home, or if you claimed a home office while it was your primary home. If either or both is your situation, these instructions will help. But they will not be definitive in their detailed guidance.

  Also, these instructions do not take into account for any depreciation you claimed prior to May 6, 1997. So I don’t know if these instructions will “fall apart” on you or not, if you have depreciation prior to May 6, 1997. 

  These instructions were written in accordance with the reporting criteria as specified in IRS Publication 523, which you can read at http://www.irs.gov/pub/irs-pdf/p523.pdf . There is a difference between Primary Home or Primary Residence, and Principle Place of Residence. For example, if you are active duty military presently stationed in Florida under PCS orders, and you are deployed to Afghanistan for 18 months (Deployment or TDY orders – not PCS), then your principle place of residence will change. Your primary home or primary residence does not change.

To qualify for the exclusion, the requirements are:

 1 - Ownership Test:

 You must have owned the home for at least 730 days (2 years) of the last 730 days (2 years) prior to the closing date on the HUD-1 statement you received at the closing when you sold the property.

2 – Use Test:

                You must have lived in the home as your primary home (not 2nd home or vacation home) for at least 730 days of the last 1826 days prior to the closing date on the HUD-1 closing statement you received at the closing when you sold it. The time it was your primary home does not have to be concurrent.

3 - During the 2-year period ending on the date of the sale, you did not exclude gain from your taxable income from the sale of another home.

 

If you meet these three tests, then all, or a portion of your gain or profit on the sale, up to a maximum of $250,000 for single, or $500,000 for married, can be excluded from your taxable income.

Paperwork you will need:

  • HUD-1 closing statement you received when you originally purchased the property

  • HUD-1 closing statement you received when you sold this property.

  • IRS Form 4562 if this property was NOT classified as rental real estate for any period of time in the tax year you sold it. This form was filed with your tax return for the tax year that you reported converting this property from rental use, to personal use.  So you should have a copy of it with that tax return.

  • Writing utensil (pencil, pen, tree bark, hammer & chisel, etc.)

  • Writing media  (paper, stone, granite, etc.)

     

    Before we can start entering data into the TurboTax program concerning this sale, you first need to gather some information and write it down. I’ll tell you the information you need and where to get it.

    Date Sold – this is the date on the HUD-1 statement you received when you sold the property.

    Selling Price – Line 401 on the HUD-1 received when you sold it.

    Sales Expenses – Most, but not all of the deductible sales expenses are listed on the HUD-1 statement received when you sold it. The total sales expenses consist of:

  • Commissions paid at settlement. Line 703 in the “paid from sellers funds at settlement” column only.

  • Appraisal Fees.  Line 804 in the “paid from sellers funds at settlement” column only.

  • Broker’s Fees. This is just another name for “Commissions paid at settlement”. If you look at your  HUD-1 Section L, you’ll see that line 700 is the title of the 700 section, and it clearly labels the 700 line series, “Total Real Estate Broker Fees”.

  • Legal Fees. Any money you paid for legal representation.  This is not reported on the HUD-1.

  • Advertising Fees. Not on the HUD-1. This is any money you paid to advertise this property for sale. Does not include monies used to advertise this property for rent, or anything else.

  • Home Inspection Reports. Any money you paid for a home inspection. This will generally not be reported on the HUD-1.  However, if the buyer’s lender arranged a home inspection and required you to pay for it, then it will be listed on the HUD-1 closing statement in the Additional Settlement Charges section, which begins at line 1300. You can only claim the amount in the “paid from seller’s funds at settlement” column. Note that a home inspection is not the same as an appraisal. A home inspection report determines the condition of the property. An appraisal determines the value of the property.

  • Title Insurance. Line 1102. Only list the amount in the “paid from sellers funds at settlement” column.

  • Transfer Taxes or Fees. Lines 1201-1206. Only the amounts in the “paid from sellers funds at settlement” column.

  • Geological Survey. Sometimes referred to as a property survey. Most lenders require a property survey to have been performed within 2 years preceding the sale. Some 5 years. If a survey was conducted by the lender as a part of this sale, the buyer is usually the one that pays for it. It will be listed on the HUD-1 between lines 1300-1305. If you agreed to pay for it, or a portion of it, your cost will be in the “paid from sellers funds at settlement” column.

  • Points paid on the buyer’s behalf. Line 802. Only the amount listed in the “paid from seller’s funds at settlement” column. But special note here. If there is an amount on line 803 in the “paid from sellers funds at settlement” column, then you will use that amount, instead of the amount on line 802 in the “paid from sellers funds at settlement” column.

    Add together all of the items above, then write down the total and label it “Sales Expenses”.

    Date Bought or Acquired – This is the date on the HUD-1 statement you received when you originally purchased the property.

    Adjusted Cost Basis: This figure includes what you originally paid for the property, and what you paid for any property improvements you made at any time after you purchased it. It does not matter if you paid for these improvements while the property was a rental, or while it was not a rental. First, we’ll get the original purchase price. Then I will tell you how to get the cost of your property improvements.

    Your original purchase price is on the HUD-1 statement you received when you originally purchased the property. Line 120.

    How you get your cost of property improvements depends on the status or classification of the property on last year’s tax return, as well as the year before that. So pick the one below that applies to you.

    If you reported on a tax return PRIOR TO LAST YEAR’S RETURN that you converted this property to personal use, go to Scenario 2. Otherwise, continue on from here with Scenario 1.

    Scenario 1

    To get the cost of your property improvements if you DID report this property on a SCH E on last year’s tax return:

      When you started this year’s tax return, I assume you imported from last year’s tax return. If so, then what we need is already in the TurboTax program. But it’s not where we need it to be. Note that you will be writing figures down. If you have any rental income/expenses to report for this property, you will do that at this time also. If this property was NOT classified as a rental on Jan 1st last year, then you will NOT change anything in the program at this point. So here we go.

    For Turbotax Home & Business, select the business tab, then “I will choose what to work on”, then elect to start/update Rental Properties & Royalties

    For all other versions of TurboTax under the Wages & Income tab scroll down and elect to start/update Rentals & Royalites.

    Now work through this rental property “as if” you still own it, making the proper selections and entering required information as necessary.

    On the screen titled “Do Any Of These Situations Apply To This Property”, select the option for “I sold or otherwise disposed of this property in 2014”, then Continue.

    On the screen titled “Review Your <propertyname> Rental Summary”, if you have any rental income/expenses to report, do so. Then elect to start/update “Sale of Property/Depreciation”.

    Now you see the list of assets/property improvements that you paid for, since you purchased this property. At an absolute minimum, this list will have one item listed, and that item will be the actual entire property itself. You wil NOT NOT NOT include the value of this item, because the value of this item is the original purchase price. {You already have that price written down, right?)

    If the property itself is the only item in this list, then you do not have any property improvements, and your “Adjusted Cost Basis” is what you paid for the property, and that’s it. Scroll down to “End of Section 2” to continue.

    So starting with the one listed after the property itself, click the EDIT button for that asset.

    Now write down the name of that asset, and the cost (what you paid for it). Note that I expect this cost to be what you actually paid for it, and not the Fair Market Value (FMV). If it’s the FMV, then you do not want this number. You want to write down what you actually paid for it.

    Click the Back button, and do the same for each asset in the list, until you have the name and cost of each asset written down. Remember, DO NOT NOT NOT include the cost of the entire property itself, that’s in that list of assets.

    When you are finished writing down each asset and its cost, click the Done button. This puts you back to the “Your <propertyname> Rental Summary” screen.  Now continue working through this rental property “as if” you still own it, until you are returned to the “Rental and Royalty Summary” screen.

    Now take all those costs and add them up. Add that total to your original purchase price (line 120 of the HUD-1 you got when you purchased the property) and that is your final Adjusted Cost Basis. Write that down, and label that amount “Adjusted Cost Basis” Scroll down to “End of Section 2” to continue.

    Scenario 2

    If you converted this property to personal use two or more years ago, then most likely, the property is not listed on the tax return you are working on right now, as it was not imported from last year’s TurboTax file. Therefore, you will need to locate the tax return of the year you converted this property from rental, to personal use. It could be the hard copy you printed, or the PDF file that you saved. Either is fine.

    What you are looking for, is the IRS Form 4562. If you did a printout or PDF save of *everything* for that specific tax return, then you will find three, IRS Form 4562’s that relate to this specific property. One of the forms is printed in portrait format, and the other two in landscape format. You want the one in landscape format that’s titled “Depreciation and Amortization Report”

    On the very first line under the Asset Description column, is the word “Depreciation”. Under this each of your property improvements is listed.

    If you EVER refinanced this property while you owned it, then after the list of property improvements you see the word “Amortization” in that same Asset Description Column. For this part, you will NOT include any of the entries under the “Amortization” line.

    At an absolute minimum, there will be a listing for the property itself. If that is the only thing listed on this paper, then you don’t need it. You already have the cost of the property itself (what you paid for it) from line 120 of the HUD-1 you received when you originally purchased it. So if this is your case, go to “END OF SECTION 2” and continue from there.

    With one exception, you will add up all the cost of all of the items under “Depreciation” and above “Amortization”. You will NOT NOT NOT include the cost of the property itself. Add together all the amounts listed in the column titled “Cost (Net of Land). Remember; do not include the cost of the property itself. Write down this total and label it “Property Improvements”.

    Now, if you ever refinanced this property at any time you owned it, those refinancing fees that you paid are identified under the “Amortization” entry in the Asset Description column.  Below that, in the Asset Description column after the refinancing fees that are listed, is a line labeled “TOTALS”. This is the total of all the refinancing fees you have paid for every time you’ve refinanced this property. The total is listed on that line, in the column labeled “Cost (Net of Land). Write this total down and label it “Refi Fees”.

    Now, add together your original purchase price (line 120 of the HUD-1 received when you originally purchased this property) property improvement costs, and Refi Fees. Write down that total and label it “Adjusted Cost Basis”.

    END OF SCENARIO 2

    Now that you have all the figures you can begin entering required information in the TurboTax program.

    For TurboTax Home & Business select the Personal tab and on the left, select Personal Income. Then click “I’ll choose what to work on”. Scroll down to the Less Common Income section and under that elect to start/update Sale of Home (Gain or Loss)

    For all other versions of TurboTax, under the Wages & Income tab select “I’ll choose what to work on” and scroll down to the Less Common Income section and under that elect to start/update Sale of Home (Gain or Loss).

    Select Yes.

    Select Continue.

    Select the property owner(s) and enter the property address, then Continue.

    From the information gathered previously, enter Date Sold, the Selling Price, your Sales Expenses and Continue.

    Enter your purchase date. This is the date on the HUD-1 you received at the closing when YOU PURCHASED IT.

    For the Adjusted Cost Basis entry, you should have this written down, and if you labeled it the way I said, you have that figure.  Enter it, and then Continue.

    For the next screen (next two screens if owned by married couple) I expect you to be selecting YES, since you are claiming you lived in the house for at least 24 months of the last 60 months prior to the date you sold the property. Those 24 months do not have to be consecutive.

    You should now be on the screen titled “Did you use this home for anything other than  your primary home?”. The information on this screen can be very, very confusing causing you to make an incorrect selection. So pay attention. This screen has nothing to do with the “two of last five years” exclusion rules. (You qualified for the exclusion on previous screens.)

  • If you were the last occupant to move out of your home before the day you sold it, and it was your primary home for the entire time from Jan 1, 2009 until you sold it,then select NO, click Continue, and skip down to  “I SAID NO” to continue these instructions.

  •  If this property was a rental for even one day after Dec 31st, 2008 before the date you sold it, and you converted it to your primary home any time after it was a rental, then you must select YES even if you converted it back to a rental again before you sold it. When you select YES, you are asked to enter the number of days that it was NOT your primary home, for the entire period of time from the date you purchased it, until the date you sold it. Enter that number and click Continue. Go to I SAID NO below.

  • If this property was your primary residence from 1 Jan 2009 until you converted it to a rental, and it was still a  rental until you sold it, select NO. Don’t worry about the conversion date. If you didn’t qualify for this exclusion on the previous screen(s), you wouldn’t even be looking at this screen.

     Now you WILL continue following the rest of these instructions from “I SAID NO” below.

    I SAID NO

    On the next screens titled “Another Home Sale” (there will be a screen for each owner) I assume you will select NO.

    On the Screen, “Depreciation after May 6, 1997” select YES since you did take (or were required to take) depreciation on your property during the time it was a rental.  It does not matter if the depreciation was taken before the last 5 years you owned it, or not. If you took *ANY* depreciation for the property during the time you owned it, you must click the YES button.

    After clicking YES, the next screen you see is also titled “Depreciation after May 6, 1997”. On this creen you will enter the total amount of depreciation you wrote down. For the AMT depreciation, enter a zero. Click Continue.

    On the screen “How did you buy your home?” I assume you are selecting NO.

    The screen you see now should indicate the untaxable portion of your gain. The taxable portion, if shown, includes the prior depreciation taken during the time the property was a rental. You are required to reclaim that depreciation, and pay tax on it, no matter what.

     Now work things on through to the end, and you’re done.

     

     

     

     

     

     


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