Possible error in allowed losses offseting regular income -Turbo Tax Premire - Max OS

Question

I was modeling the sale of my rental house for 2022. Saved a separate file/renamed then used easystep to add the sale (house v. lot, etc). Upon completing the form I noticed that I had a 0 income for 2021.

In reviewing the forms it appears that for some reason on Schd E worksheet for the rental house it puts in all of the carryover losses into the yearly expense form rather than just enough to zero out the profits. This is shown on line 22 Schd E worksheet for that property. Interestingly it does this for both properties I own even though I am only selling one. If I look at the form on the one not showing the sale on line 22 is only enough carryover loss to zero out the profit from the year.

Then on page 2 of schedule E the house sale file shows all carryforward (those include partnerships, trusts ect.) losses to be allowed - totaled on line 41, and moves that data to Schd 1 for form 1040. This essentially allows for all of my carryforward losses to be offset against my income rather than limit of 3K. This is how it is handled on the file without the house sale.

On the file without the house sale, only 3K is "used" from the carryover capital gains worksheet to offset a small portion of my regular income and the residual losses are shown on the carryforward worksheet.

Schedule D is the same on both files and shows the 3K loss being moved to line 7 of form 1040

I think the error is in Schd E part II where the form in the file with the house sale takes all capital losses, shows them as allowable losses, (the carryovers are shown as unallowed losses on Schd E part II of the file without the house sale) that then transfers to Schd 1 line 5 that then goes to line 8 form 1040.

While I have enough long and short term losses that the house sale will be zero out. I should have about 200K of carryforward rather that using it against my regular income.

I know this is complex, but I think I understand the law/rules and I believe that the program is making an error in allocating long and short term capital gains to offset more than 3K or regular income.

I am happy to provide either screenshots or my files for review or correcting my knowelge.

Carl11_2 · Answer

I was modeling the sale of my rental house for 2022. Saved a separate file/renamed then used easystep to add the sale (house v. lot, etc). Upon completing the form I noticed that I had a 0 income for 2021.

I assume you were modeling this in TurboTax 2021 desktop version "as if" you sold the property in 2021.

When you sell a rental property, all suspended losses are released in the year of the sale from all "other" income, provided of course you have the "other" income to claim those losses against.

Also, if the rental property has multiple assets, things have to be done a certain way in the TTX program, or you risk the possibility of incorrect depreciation recapture, among other issues. The guidance is below.

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 have a selection on it for "I sold or otherwise disposed of this property in 2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" 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 if it's zero. Then you MUST work through the "Sale of Property/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 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" 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.