Sold a converted rental home & capital gains

Forum|Forum|3 years ago
February 10, 2023
1 reply
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Here's my situation. I bought a home in 2002 and lived there until 2018, when it was converted into a rental. It was sold in late 2022. I know I'm beyond the 2 of 5 years exclusion, but TT wants me to pay the entire capital gains from my original date of purchase after renting it for only four years.

Is there a way to pro-rate the capital gains starting with the value of the house when it entered the rental market, or am I indeed on the hook for capital gains tax all the way back to the original purchase?

mglauner

If you set up your Rental Home in 2018 with the Cost Basis you paid for it, and you have been Depreciating it since then, it's not unusual to have Capital Gains when sold at a higher price in today's market, since you are also recapturing depreciation taken.

If the house was worth more than you paid for it when it entered the rental market, you could have used the increased Basis when setting up the rental, but it is problematic to change that amount now.

However, you can you add any Improvements as Rental Assets so that when you report the sale of the home and the assets you have a larger Cost Basis.

In this case, indicate in the Rental section that you 'stopped using the property for business' and enter the sale in the Sale of Business Property section.

Click this link for discussion on Adding Rental Assets and reporting sale.

When asked about 'Special Handling' say Yes. When asked if this asset was included in 'Sale of Main Home' say Yes.

You may qualify for a Partial Exclusion of Capital Gain.