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No Section 121 exclusion because she doesn't meet the 2 out of 5 year rule. Her basis is what she paid for the home plus major improvements minus depreciation. Yes, it goes on the 4797. I don't understand the desire to lower her gain. She made money from the investment and has to pay a fraction of it in taxes. That still leaves her with plenty left. When any of my clients tell me they are going to sell a rental property, I ask them to give me the sales paperwork when they do so I can tell them how much to put aside for taxes. That way there are no surprises and they expect the tax bill.

They're lying. Anything less than a total reconstruction from the beginning of time would be inadequate, and they won't want to pay for that.

She did not live in the home two of the past five years. It is reported on 4797, correct.

I read the original post as the home that taxpayer owned and later rented was owned solely by the taxpayer. She has children and may or may not have had a step-up in the past from a deceased spouse, or she could never have married, or married and divorced. I think that is the property now being sold that the kids were living in until 2020 that was then turned into the rental. The original post makes no mention of that or a previous spouse related to the home/rental being sold. Taxpayer moved out of property being sold in 2014 and then married the now-deceased husband and moved into his home. To me, it sounds like she may still be living in the home of the now-deceased husband.

If it was my client, first I would nail down all the balance sheet accounts as of last year end to the best of my ability. I would use a 3115 to correct the vehicle depreciation, then remove the vehicle from the balance sheet at the original cost. Then the remaining loan balance as of last year end should be reclassified to APIC. Good Luck, you have a lot of work ahead of you.

Sounds like there was a possibility this was separate instead of marital property for husband's estate, with full step up in basis.

I had a client sell a rental home this past year. Normally not a problem. He was a year from going on Medicare and was getting a big advance credit on the health insurance exchange. With the gain, his income went way up and he had to pay back the credit. Ouch.

The original owner of our firm seemed to have no rhyme or reason to his fees, until it hit the new owner and me that he was often charging based on ability to pay. That applied mainly to wealthier clients, who had exorbitant fees. Those with six-figure incomes with little more than W2s, Sch A, and bank interest were on the hook for $600 or more (and this was 20 years ago). A family-owned group of businesses that was making tons of money was charged triple just for monthly bank reconciliations compared to our other business clients. When he sold the firm, some of the clients did question their fees. We reduced most of them, many before they asked. So charging based on ability to pay works both ways. Like most of us, I do a bit of pro bono work and have a few clients whose fees I haven't raised in forever because I know they are struggling. For the majority, though, I am not one to give away my work. I have professional credentials, years of education and experience, and I give every return the time including research if needed to best serve that client. For this, I should be paid. We don't have many EITC clients, but even though they are low income we don't undercharge. There are risks involved with that category, and the extra due diligence takes time.