The sales is completely business and the sale of rental property would be reported on Form 4797.
When selling a converted rental property, you need to be aware of three things:
- Your adjusted basis in the property, both at the time of conversion and at the time of the sale.
- The sale price.
- The fair market value of the property when it was converted to a rental property.
The adjusted basis at the time of conversion and the fair market value at time of conversion are needed when determining the gain or loss from the sale. The value of property is for the rental building only, not the land it sits on.
If the property is sold at a gain, the basis used in determining the gain is your adjusted tax basis at the time of sale. However, if the sale results in a loss, the basis is the lower of the property's adjusted tax basis at the time of conversion or the fair market value of the property when it was converted from personal use to rental.
For example:
James converted his residence to a rental property, Original purchase paid, $420,000 for the property. The land was assessed at $50,000 and the home was $370,000. When James converted the home into a rental, the fair market value was $550,000 with $60,000 of that for the land. Five years later he sells the property for $600,00.
This is what it would look like:
- Original cost $370,000
- FMV at conversion $490,000
- Depreciation taken $ 85,000
- Adjusted basis if sold at gain (#1 - #3) $285,000
- Adjusted basis if sold at loss (less of #1 - #3 or #2 - #3) $285,000
- Sale Price $600,000
- Capital Gain (#6 - #4) $315,000
See TurboTax FAQ here
for instructions for Form 4797
