Conversion of rental property to personal use

Forum|Forum|3 years ago
February 12, 2023
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Property was converted from rental to personal use on 4/30/22. Turbo Tax premier is calculating proper depreciation for partial year and there is small net rental income after expenses for the year. It is also showing a disposition of the rental house on Form 4797 with 0 proceeds less the total depreciation taken over the years and it is allowing a current year loss to the extent of the net rental income. This does not seem right to me that a disposition will be reflected on Form 4797 since the rental property was not sold, and moreover that any loss on sale of a property would be allowed.

MAK70

Because the property was converted to Personal Use and not sold, there has not been realized gain/loss yet. The Form 4797 is Disposition of Business Property, which includes the conversion to personal use. (It closes out the Schedule E for reporting). When you sell the property, you will have to account for the depreciation to determine the gain or loss (essentially it is suspended).

BJB61Author

Thank you! While I was aware the realized gain computation, and the impact of the depreciation taken (recapture) was suspended until the property is actually sold, I couldn't figure out why the current year rental income was offset by a loss flowing from Form 4797 this year. I don't fully understand what the Form 4797 loss represents this year.

DianeW777

Let's review your steps. Based on your question it seems there may be a question that has not been answered correctly when showing the conversion from rental to personal use without any sale.

Key Question: Special Handling: be sure to answer "Yes" for Special Handling Required. This assumes those unsold assets were converted to personal use, and results in no gain or loss for the disposition.

When you are in the rental activity for 2022, you must select the 'Assets' section, then in each asset you must go to the screen titled 'Tell Us More About This Rental Asset'.

Once you reach this screen for each asset, you must select 'This item was sold, retired, stolen, destroyed, disposed of, converted to personal use....'
Next enter the date you stopped using the asset for rental purposes. And answer 'Yes' you always used this asset 100% of the time for business. (The percentage of use doesn't change until after conversion from rental to personal use.)
Select 'Yes' for Special Handling due to 'You converted the asset to 100% personal use'.

You may see some depreciation expense which will be the partial year amount. For the period of the year it was available for rent, you may have some expenses which are allowed for that open period.

Keep all of these records because you will need them when and if you sell this home. All depreciation will be recaptured at that time, regardless of how long you hold the property for personal use. The records are necessary until you completely dispose of or sell the property.

Once you make this change you will not see a sale reported on Form 4797.

@BJB61