How do you account for the sale of a capital asset (roof and gutters in my case) when selling a rental property?

Forum|Forum|6 years ago
February 17, 2020
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Under the assets section of the property, I have the property and an entry for the new roof and gutters. The original cost for the roof was $7,000 and it's been depreciating for the last 3 years.
Now that I've sold the house, I entered the sale price and expense on the property but I have to close, or somehow include the roof. TT won't let advance without putting a sale price on the roof (I tried $0). Preferably I'd like to account for the loss to decrease the gain/ tax burden.

TurboTax Online

Carl11_2

Employee

As you know, the property itself has two components, each with their own cost basis. First is the land. For reporting the sale, you will not change or allocate the land sales price under any circumstances.

But the structure sales price has to be allocated across all other depreciable assets. The below contains pertinent information about the "how and why" of allocating that structure sales price.

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 2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" 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

If you show a gain on some assets and a loss on others, the program just flat out can not deal with this "correctly" in every situation. It will in some, but not all. So that's why I recommend you assume the program will not handle your specific situation correctly, when reporting the sale of rental property with multiple assets included in the sale.

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" 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.

LordoftheLandAuthor

Thank you @Carl11_2 .

As far as this property, I have two asset entries; one line item for the property (asset & land) and one line item for the new roof. Based on your response, I should have/ add another asset for the sale of the property. Is that correct?

I guess there's only one item for the property because I only tracked depreciation of the asset, not the land.

This still leaves the roof asset.

So I sold the house for 432K and paid 23k in fees. Based on my property tax bill, the land is valued at 20%. My plan is to allocate 80% of the gain and fees to the asset and 20% to the land. Should I 'sell' the roof for a $1 since it's part of the house and lose the remaining depreciation?

Carl11_2

Employee

No, you will *NOT* add a third asset entry. That would be totally wrong.

Based on my property tax bill, the land is valued at 20%

For reporting the sale, you can burn the property tax bill. it's totally and completely irrelevant.

My plan is to allocate 80% of the gain and fees to the asset and 20% to the land.

Percentages are irrelevant. Since you sold the property at a gain, you *MUST* show a gain on each individual asset. Elect to edit the property itself. See the COST and LAND boxes? Now the amounts in those boxes, you will *NOT* change under any circumstances and with no exceptions.

What's in the COST box is your cost basis for the "ENTIRE" property - land and all. What's in the LAND box is how much of the amount in the COST box is allocated to the land. Subtract LAND from the COST and that's the amount allocated to the structure. It's also the amount that your depreciation has been figured on since you placed the property in service.

For allocating your sales price, your sales price for the land must be "at least" one dollar more than the cost of the land that you see in the "LAND" box. Then what you have left over is allocated between the structure and the new roof, ensuring that you allocate so that "BOTH" the structure and the new roof show a gain. It flat out does not matter if you show a $500K gain on the structure and a $1 gain on the roof. But since you sold at a gain, you must show a gain and each and every single asset even if it's only a $1 gain.

To make it easier, you only need to allocate your sales expenses on the "main" asset between the land and the structure. That makes your sales expenses on the roof, zero. The IRS isn't overly picky about allocation of sales expenses. So if you want to do a 20/80 split between land and structure, that's not a big deal. Easier math on the brain that way to ensure you actually show a gain on all assets after deducting your sales expenses.

Should I 'sell' the roof for a $1 since it's part of the house and lose the remaining depreciation?

No. Do that, and you've sold the roof at a loss and the remaining asset at a gain. You need to allocate your sales price so that the roof is sold for "at least" $1 more than it's cost as shown in the COST box on that specific asset. Allocate a sale price lower than what you paid for it, and chances are, the program will screw that up mathematically and you'll never know it and never be able to figure out why your return continues to be rejected by the IRS so matter how many times you try to e-file.