Question

Sale of Rental Property / Depreciation / Losses

Forum|Forum|4 years ago
April 9, 2022
2 replies
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I sold a rental property in 2021 that was converted from a main home in 2012. Until this year, I never claimed depreciation. Every year was a loss since tenant rent did not cover mortgage and other expenses. My available loss deducation that accumulated was calculated to be over $104,000. The house was purchased on 2005 for $367,663 and land value was $78,000. The home sold for $380,000, but commissions were $22,800 and there were many sales expenses. The amount that went to me and the mortagae pay off was $357,200, which is $10,463 less than what I paid for the home. And that doesn't account for the sale expenses lost.

Now comes depreciation. Under the Sale of Property / Depreciation, I indicated that the home was sold, gave the requested information and it calulated that I could have claimed $92,603 in prior years and $10,094 this year. I'm not being asked for a sales price here and I've read a lot of conflicting posts on that. The botton line is that when I follow any of the several suggestions regarding how to input the sales information, because of this depreciation recaputure, I go from a refund of nearly $14K to owing nearly $14K.

What's going on here? This property has costs me a ton of money and I did not make a profit on the sale. Tubo says I'm entitiled to $104K in losses now that the home is sold. What am I doing wrong here? Do I owe $14K or am I due $14K? I know about Form 3115 to claim the prior depreciations, but that's even more confusing that my current predicament. So before going there, is there anything in what I'm saying about that is a hint of something I might be able to easily correct?

TurboTax Home & Biz Windows

T

taxlady28

Sadly, deprecation must be paid back when you see a rental property even if you never claimed it. It is a good lesson for others to claim their depreciaton every year.

KrisD15

"I sold a rental property in 2021 that was converted from a main home in 2012. Until this year, I never claimed depreciation. "

Unfortunately this is a problem.

The IRS does not necessarily demand you claim depreciation yearly HOWEVER the IRS does demand you "recapture" the depreciation whether you claimed it or not.

How did you report the rental each year? What did you report as the basis for the rental on your Schedule E?

The basis would have been the Fair Market Value at the time you switched from personal to rental or what you originally paid, whichever was lower.

"Now comes depreciation. Under the Sale of Property / Depreciation, I indicated that the home was sold, gave the requested information and it calulated that I could have claimed $92,603 in prior years and $10,094 this year. I'm not being asked for a sales price here and I've read a lot of conflicting posts on that."

True, the program first needs to know what has happened with the rental up until the sale before it can compute the sale itself.

Rentals are depreciated over 27.5 years. It was a rental for almost 10 years. If the basis of the rental was 367,663 (it could have been something else since you don't say what the fair Market Value was) about 104,000 depreciation sounds right.

So the adjusted basis would be about 366,000 - 104,000 = 262,000

If you received about 358,000, that would be a recapture of about 96,000.

Once the rental is listed, you need to go to the asset list of that property to report the sale.

Go back into the rental section, and review. Click EDIT by the property, then scroll down to "Sale of Property / Depreciation"

Yes, you could have carried over the rental loss year after year and applied that loss when you sold the rental, did you do that?

This is something that would have needed to be reported each year so that the IRS can trace it.

@aamedia

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A

aamediaAuthor

Hi Kris,

I've carried over the years of loss and will claim them. I had not been claiming the depreciation since I've never noticed anything that even mentioned listing the home as an business asset once it became a rental and Turbtax never found errors. We're not borning knowning these things.

All of the numbers I gave are after I've already entered the "Sale of Property / Depreciation" information and reported the sale. I'm confused on where to report the actually selling price because there doesn't appear to be a way to do that in this section. As mentioned, different people have reported different things. Some people said to do it under "Sale of Business Property" and that seems incorrect if I'm already reporting sale in this section. Others said to say "no" to "special handling" in the "Sale of Property / Depreciation" section and go with the "Home Sale". But according to what I see under "special handling", you should check "yes" on rentals. So I checked yes and it tells me the depreciation deduction for 2021 will be transferred to the correct form. But now where do I report the selling price?

What's the correct answer here for me to be able to add the selling price for the home so it can figure this out properly. If I say yes to special handling and I'm not asked for the selling price, the totals of my federal and state refund us about $13,900. If I try to add the selling price by following what some people have said about listing under "Sale of Business Property", now I owe a fortune and the same thing happens if I say no to special handling and try adding the selling price there. When I run the review, all of these options say there are no errors$%$@!? Which road am I supposed to be taking?

Turbotax has already calculated my loss, but has it been applied already or is that going to factor in later once this is straight?

@KrisD15

ColeenD3

This is not something you can just continue with as if not taking depreciation is not a big deal. Yes, you are going to have to pay a lot of money on any gain and the depreciation recapture. Part of the problem is that your depreciation should have been based on the lower of the FMV or the adjusted basis on the date you placed it in service. You need to correct this and the only way to do it is to file a Form 3115. Since you are forced to recapture the depreciation you never took, you need a way to also claim it.

Tuesday, January 18, 2022

12:16 PM

Unfortunately the depreciation recapture is "allowed or allowable" meaning even if you never depreciated it, you would still have to recapture the depreciation. Depreciation taken would be on line 18 of Schedule E.

One solution is to elect an accounting method change and file a Form 3115 in the current year and take the prior depreciation as a section 481(a) adjustment. [land value is separated, land is not depreciated]

Below are the IRS links related to the change in accounting method. TurboTax does not have that form.

May be these will help

Form 3115, Application for Change in Accounting Method

Change-in-Accounting-Method

Instructions for Form 3115 (03/2012)

Instructions

Form 3115,

Form 3115