Sold Rental Home - Was Primary Residence - Tax Situation

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bogleviewer
Posts: 343
Joined: Thu Aug 25, 2011 11:01 pm

Sold Rental Home - Was Primary Residence - Tax Situation

Post by bogleviewer » Fri Dec 15, 2017 7:56 pm

In 2008 I purchased a home and used it as my primary residence from 2008 to middle of 2016 (8 years). In middle of 2016 I moved and rented it out for a one year lease and sold the property middle of 2017 immediately after the tenant vacated. I did take depreciation and claimed the income on my 2016 income tax return and will be on my 2017 federal income tax return. I am generating some prep work for 2017 taxes and input in the answers to the questions in Turbo Tax Premier 2017. It is listing a GAIN of over $35k when I only had a $2000 net rental income gain. I'm confused, I thought that as long as a residential home was used as primary residence in 2 of the last 5 years then it can have a $250,000 per tax payer exemption?

In this case I bought the house for around $300,000 and sold it for around $335,000 nine years later with only the last 12 months it being a rental with around $10,000 worth of depreciation between 2016 and 2017 income taxes. So my gain was $35k on the sale of the house not including the $10k worth of depreciation took/taken in 2016/2017.

What is going on here? Am I really liable for 33k worth of home basis to sales price gain because I rented it out for one single year (in which I didn't even collect nearly 33k worth or even 23k worth of rent (minusing out the depreciation I received off taxes). In other words, if I have to pay taxes on $35k gain (sales price minus basis) then I will pay more in taxes then I generated in net income (by a big margin!)

Am I correct in thinking that because it was my primary residence for atleast 2 of the last 5 years that I AM INDEED EXEMPT from up to $250,000 worth of gain on it even though when I sold the home it was a rental property? So I pay $0.00 on the GAIN (sales price minus basis) but do have to pay income tax on the $10k worth of depreciation and 2017's worth of income it generated?

Anyone have some advice or tips on how to properly input this into Turbo Tax? I'm going to be really aggrevated if indeed I basically rented the property out, took the risk only to pay more in taxes than I made on the property with a one year lease agreement when I could have sold it without renting it out and pay nothing in taxes.

CLIFFS:
Bought primary residence in 2008 and used until 2016. around $310,000 purchase price.
Rented it out from middle of 2016 to middle of 2017. Took depreciation and clamined income for 2016 (And will for 2017).
Sold in middle of 2017 as soon as tenant left at around $335,000.
AM I RESPONSIBLE FOR PAYING FEDERAL INCOME TAXES ON THE gain and depreciation or only the depreciation from 2016/2017 as well as the 2017 net income it generated?

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by DrGoogle2017 » Fri Dec 15, 2017 8:12 pm

If you know you are right, go back and check the data source for your income. TT is not always right. I caught at least 2 mistakes since I’ve been using TT since early 1990s. It maybe the way you answer the TT questions. Easier to skip to the forms.

ResearchMed
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Joined: Fri Dec 26, 2008 11:25 pm

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by ResearchMed » Fri Dec 15, 2017 8:25 pm

bogleviewer wrote:
Fri Dec 15, 2017 7:56 pm
In 2008 I purchased a home and used it as my primary residence from 2008 to middle of 2016 (8 years). In middle of 2016 I moved and rented it out for a one year lease and sold the property middle of 2017 immediately after the tenant vacated. I did take depreciation and claimed the income on my 2016 income tax return and will be on my 2017 federal income tax return. I am generating some prep work for 2017 taxes and input in the answers to the questions in Turbo Tax Premier 2017. It is listing a GAIN of over $35k when I only had a $2000 net rental income gain. I'm confused, I thought that as long as a residential home was used as primary residence in 2 of the last 5 years then it can have a $250,000 per tax payer exemption?

In this case I bought the house for around $300,000 and sold it for around $335,000 nine years later with only the last 12 months it being a rental with around $10,000 worth of depreciation between 2016 and 2017 income taxes. So my gain was $35k on the sale of the house not including the $10k worth of depreciation took/taken in 2016/2017.

What is going on here? Am I really liable for 33k worth of home basis to sales price gain because I rented it out for one single year (in which I didn't even collect nearly 33k worth or even 23k worth of rent (minusing out the depreciation I received off taxes). In other words, if I have to pay taxes on $35k gain (sales price minus basis) then I will pay more in taxes then I generated in net income (by a big margin!)

Am I correct in thinking that because it was my primary residence for atleast 2 of the last 5 years that I AM INDEED EXEMPT from up to $250,000 worth of gain on it even though when I sold the home it was a rental property? So I pay $0.00 on the GAIN (sales price minus basis) but do have to pay income tax on the $10k worth of depreciation and 2017's worth of income it generated?

Anyone have some advice or tips on how to properly input this into Turbo Tax? I'm going to be really aggrevated if indeed I basically rented the property out, took the risk only to pay more in taxes than I made on the property with a one year lease agreement when I could have sold it without renting it out and pay nothing in taxes.

CLIFFS:
Bought primary residence in 2008 and used until 2016. around $310,000 purchase price.
Rented it out from middle of 2016 to middle of 2017. Took depreciation and clamined income for 2016 (And will for 2017).
Sold in middle of 2017 as soon as tenant left at around $335,000.
AM I RESPONSIBLE FOR PAYING FEDERAL INCOME TAXES ON THE gain and depreciation or only the depreciation from 2016/2017 as well as the 2017 net income it generated?
I'm not quite following some of this, and I have no idea how Turbo Tax works (we don't use it).

However, you are *correct* about how the $250k tax-free profit ($500k for a couple) would work for property used as a primary residence for the appropriate amount of time. And the timing you are describing would qualify.

It seems that the software is calculating a gain due to the appreciation... which seems to be exactly what has happened.
Why do you find this problematic?

When you file taxes, you do not pay tax on up to $250k of profit, given the appropriate circumstances.
I'm not sure why you see this as a problem, as you do seem to understand the rules about the personal residence exemption, and the specifics when it is used as a rental for a part of the time.

I'm with DrGoogle2017, about skipping the software and using the forms if necessary.
(Until very recently, I did taxes by hand "using the forms", and this included a couple of times with a profit from a primary-residence-used-as-rental, like you. The IRS didn't seem to have a problem with any of it.)

I'm not sure about the depreciation recapture.

RM
This signature is a placebo. You are in the control group.

Ace1
Posts: 191
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Location: Twinsburg Ohio

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by Ace1 » Sat Dec 16, 2017 12:56 pm

BV
I also find it significantly better to work thru the forms rather than the interview in TT.

So there are 3 forms/worksheets you will want to open and review.
If you click the forms icon (or menu item), all the forms in your return will be listed in the left side window.
Asset wks, Home adj basis, and Home Sale Worksheet are the ones you will want to review.
You should have an Asset Entry Worksheet upon which the basic data for the home is entered, and is the source for the depreciation you have taken.
On page 2 of that form is the disposition data... make sure the box on line 36 is checked (x).
Also, on line 28b is what you may be missing... it is the TT link to the Home Sale Worksheet.
Double click that line to connect the sale up to the Home Sale Worksheet, which is where
all the relevant sale data is located. You will need to make sure the number of months or days data is entered in part III.
Update the Home adjusted basis worksheet if needed first.
Since approximately 1/8th of the time you owned the property it was rental property, 1/8th of the gain WILL
be taxable. Depreciation recapture is also included in this taxable gain and exclusion calculation.
So you wont have to pay tax on all the gain, just a portion of it plus the depreciation also taken.
Hope this helps you find what’s missing.
Ace

bogleviewer
Posts: 343
Joined: Thu Aug 25, 2011 11:01 pm

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by bogleviewer » Sat Dec 16, 2017 2:35 pm

OP here.

Thanks for those that responded. My understanding of the tax law (outside of Turbo Tax) is that as long as a residential property is used as a primary residence in 2 of the previous 5 years, and haven't taken the primary residence exemption on taxes in the past two years then you qualify for up to $250,000 exemption (per tax payer that used it as primary residence). So in my case, since I did use it for 2 of the past 5 years (in fact, 4 of the past 5 years) then I am exempt on the gain of the sale up to $500,000 (me and spouse). Of course, my gain isn't anywhere near that so I don't pay a penny in income taxes on the property gain. However, I am subject to the depreciation recapture for what was depreciated in the 2016 and 2017 income tax return on the property. I have to pay this back, which is what I was expecting anyway.

The advice from Ace1 about going into the Asset Wks and then CREATING and LINKING the "home sale worksheet" did the job. What I was running into previously is that it was also calculating 100% of the gain as taxable as a sale of a business asset.

Schedule E reflects the income/loss for 2017 including the 2017 depreciation.
Schedule D reflects the depreciation recapture (line 11A from form 4797 sale of business property)
Form 4797 reflects the LAND portion of the sale (which I calculated at 10% since land isn't able to depreciate).

I still don't undertasnd the "section 121 exclusion" listed on Form 4797 or where linen 6 of form 4797 is coming from. The Schedule D (and subsequently my 1040 line 13 where schedule D sum goes) is correct (just shows 100% of the depreciation recapture). I just don't know about 4797, I'll have to look into this form from IRS publication.

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Watty
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Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by Watty » Sat Dec 16, 2017 2:55 pm

It would probably be worthwhile to have your taxes professionally done this year.

4nwestsaylng
Posts: 215
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Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by 4nwestsaylng » Sat Dec 16, 2017 4:22 pm

You know, just hire a CPA (not an "enrolled agent"), I have found that is the best way, they more than earn their fee. I have never used TT,I know many use it, but in this case I would for sure let the CPA handle it. For one thing, if there is further paperwork needed in the future, ie if you need to appeal something, TT is not going to do it for you, the CPA will be better at filing the appeal.

Ace1
Posts: 191
Joined: Sun Dec 26, 2010 7:29 pm
Location: Twinsburg Ohio

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by Ace1 » Sat Dec 16, 2017 7:33 pm

BV
Digging deeper... you probably should review irs pub 523 sale of home and pub 587 business use of home.
On p 16 of 587 it does imply you can exclude the entire gain on the sale since you do meet the 2 years use in 5 rule.
As for the 4797, right click on the line on the form in TT and review the appropriate item in the popup window.
It may provide more insight into the entry.
Ace

Ace1
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Joined: Sun Dec 26, 2010 7:29 pm
Location: Twinsburg Ohio

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by Ace1 » Sat Dec 16, 2017 10:45 pm

BV
The entry on 4797 comes from line 37 on the home sale worksheet.
Basically it is the total gain less the depreciation being recaptured, which is the amount of the gain
that is excluded. Make sure you do not have either box checked on line 19a of the home sale worksheet.
That should do it.
Ace

JGoneRiding
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Joined: Tue Jul 15, 2014 3:26 pm

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by JGoneRiding » Sun Dec 17, 2017 12:14 am

Ace1 wrote:
Sat Dec 16, 2017 7:33 pm
BV
Digging deeper... you probably should review irs pub 523 sale of home and pub 587 business use of home.
On p 16 of 587 it does imply you can exclude the entire gain on the sale since you do meet the 2 years use in 5 rule.
As for the 4797, right click on the line on the form in TT and review the appropriate item in the popup window.
It may provide more insight into the entry.
Ace
We have covered this many times. You need to read to the bottom of the pub. It explains this. You owe tax for the prorated 1 year of gain.

Ace1
Posts: 191
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Location: Twinsburg Ohio

Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by Ace1 » Sun Dec 17, 2017 1:02 pm

JGoneRiding,
When I made my original post earlier in the thread, I thought the same as you... a prorata portion of the gain would be
subject to tax. Further reading in pub 587 led me to agree with the OP ... that none of the gain is taxable EXCEPT for
any recapture of depreciation as I subsequently posted which prompted your post.

Your comment that this has been discussed before was a good suggestion.
In this thread... viewtopic.php?t=187056
the conclusion is as I and the OP thought... NO gain other than depreciation recapture is taxable.
MarkNYC indicated relevant code notations and comments to support this.
I think this is the correct way for the OP to report on his tax return.

I also noted in another thread you indicated some rule change in 2009, that supported the prorata gain inclusion,
but this seemed to be for a reverse version of rental to residence situation, not the current OP situation of residence
to rental.
Ace

JGoneRiding
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Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by JGoneRiding » Mon Dec 18, 2017 12:22 pm

If you read way down pub 587 i think it lays it out well. Either way he definitely doesn't owe on the whole gain for sure plus I would think at only 35k he just needs to better lay out losses. Such as realtor and improvements.

I have been worried that TT fails to account for it correctly and would try to do to us what he is seeing where it tries to count the whole gain and that is definitely wrong

Edit: I apologize. It's pub 523 he wants, selling a home, and page 15 has the appropriate worksheet that shows he will owe for depreciation and small capital gains. But it should be very little

newblogger
Posts: 1
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Re: Sold Rental Home - Was Primary Residence - Tax Situation

Post by newblogger » Thu Feb 01, 2018 1:12 pm

I had this same problem with Turbo Tax Premier 2017. Bought house for 200K in 2012, sold it for $250K in 2017. Primary residence the whole time. Married filing jointly. Turbo Tax said I owed taxes on my gain even though I answered all of the questions in such a way the exclusion should apply. did you get this issue resolved? If so, how? Was it a Turbo Tax issue? The sales price doesn't even meet the $500K filing jointly amount, so I am tempted to exclude the form altogether, but am worried there is a 1099S out there somewhere.

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