sale of residence exclusion

[Possi]

I am in a rabbit hole. My client owned her house for over 5 years, rented it in 2017  and 2018, sold it in 2019. I know she qualifies for the reduced exclusion and must recapture depreciation, but my brain can't figure out how this is negotiated. 

I use Taxwise, but I just need to know where this goes. 

Do I still use the 4797 for the sale and somehow use the Sch D to reduce the gain? I'm so lost. And tired. 

[Pacun]

I think you start with Schedule D and then go to the "sale of primary residence" then it will take you to form 8949. After you enter the info, the exclusion will be transferred to the front of Sch D.  Since your client lived in the house prior to renting it, you don't have "non-qualified days".

 

[jklcpa]

18 minutes ago, Possi said:

I am in a rabbit hole. My client owned her house for over 5 years, rented it in 2017  and 2018, sold it in 2019. I know she qualifies for the reduced exclusion and must recapture depreciation, but my brain can't figure out how this is negotiated. 

I use Taxwise, but I just need to know where this goes. 

Do I still use the 4797 for the sale and somehow use the Sch D to reduce the gain? I'm so lost. And tired. 

I can't tell you exactly how to enter this in your software, but the description below is from the 4797 instructions and describes that the gain is reported in Part III and the 121 reduced exclusion would be a negative number in Part I:

 

Quote

Exclusion of gain on sale of home used for business.

You may be able to exclude part or all of the gain figured on Form 4797 if the property sold was used for business and was also owned and used as your principal residence during the 5-year period ending on the date of the sale. During that 5-year period, you must have owned and used the property as your personal residence for 2 or more years. However, the exclusion may not apply to the part of the gain that is allocated to any period after December 31, 2008, during which the property was not used as your principal residence.

If the property was held more than 1 year after you converted it to business use, complete Part III to figure the amount of the gain. Do not take the exclusion into account when figuring the gain on line 24. If line 22 includes depreciation for periods after May 6, 1997, you cannot exclude gain to the extent of that depreciation. On Part I, line 2, write "Section 121 exclusion," and enter the amount of the exclusion as a (loss) in column (g).

If the property was held for 1 year or less after you converted it to business use, report the sale and the amount of the exclusion, if any, in a similar manner onPart II, line 10.

For details and exceptions including how to figure gain on the sale of a home used for business and the amount of the exclusion, see section 121 and Pub. 523.

 

[grandmabee]

Correct do the worksheet on the sale of residence tab on 8949.  only recapture depreciation .

[Abby Normal]

3 hours ago, grandmabee said:

Correct do the worksheet on the sale of residence tab on 8949.  only recapture depreciation .

Except, as jklcpa already noted, the Sec 121 exclusion maximum is reduced, depending on how many years it was used as a residence and how many years it was rented.

[Sara EA]

I think we're all bumping into these types of issues at this time of year.  We know exactly what the outcome should be, but how to tell the software?  I spent the good part of the morning on a return with foreign income exclusion.  That was the easy part, fighting with the software took a lot longer.  Diagnostic that address was incomplete.  Well, I didn't enter a city or state because she lived in France, duh.  Same with employer EIN.  I just kept going to the help screens in UT and eventually got it worked out but it took a lot of time.  These types of events show why we are tax Professionals.  We know what the result should be, and if the form doesn't match our expectations we have to figure out how to tell it what to do.

[Abby Normal]

Yep. We have to know the tax code and the software code.

[BulldogTom]

14 hours ago, Sara EA said:

These types of events show why we are tax Professionals.  We know what the result should be, and if the form doesn't match our expectations we have to figure out how to tell it what to do.

Never was a more true statement made.

Tom
Modesto, CA

[Medlin Software, Dennis]

"We know what the result should be, and if the" (result) "doesn't match our expectations we have to figure out how to tell it" (the software) "what to do."

I should save this for my potential customers who expect obtaining and using software will make them competent.  My usual example is obtaining an MD's travel bag and contents does not make them an MD, but I like this one better.

Experience, training, and (what used to be) common sense are always in demand.

[Catherine]

On 3/11/2020 at 1:27 PM, Medlin Software said:

customers who expect obtaining and using software will make them competent

You are spot-on, @Medlin Software.  When I was training our current assistant as well as my prior assistant, I told each of them that they need to be able to look at the papers that came in for the client, and *know* what the final return should look like from those.  Because the software can't do the thinking for them, and the software can come up with incorrect results. 

[Abby Normal]

So I got to do my first one of these, where the home was used for more than 2 of the past 5 years, but rented for less than 3 years when it was sold.

First off, it was a bear getting ATX to magically show all of the hidden lines I needed, but after I figured it out, ATX wanted to make part of the gain, in addition to the depreciation amount, taxable. Is that right? I thought you just reduced the 250K per owner exclusion, which ATX did not do.

The total gain was about 30k. The deprec was about 9k. ATX used the percent of non personal use over the entire ownership period of about 23% time the 30k gain, or about 7k, and added to that the deprec of 9k for a 16k reportable gain.

Is ATX right?

[Lion EA]

I haven't done one, so it's not in my memory which way is which, but it depends on if the rental was before or after the personal use whether you get a percentage of the exclusion or the whole exclusion (except for depreciation). Look it up to make sure ATX is doing it right. "Period of Qualified Use" might be the term.

[Abby Normal]

ATX gave me the full 500k exclusion (married) but it made part of the gain taxable, perhaps because it was a rental when it was sold?

[jklcpa]

1 hour ago, Abby Normal said:

So I got to do my first one of these, where the home was used for more than 2 of the past 5 years, but rented for less than 3 years when it was sold.

First off, it was a bear getting ATX to magically show all of the hidden lines I needed, but after I figured it out, ATX wanted to make part of the gain, in addition to the depreciation amount, taxable. Is that right? I thought you just reduced the 250K per owner exclusion, which ATX did not do.

The total gain was about 30k. The deprec was about 9k. ATX used the percent of non personal use over the entire ownership period of about 23% time the 30k gain, or about 7k, and added to that the deprec of 9k for a 16k reportable gain.

Is ATX right?

121(b)(5)(C)(ii)(I) is the exception to nonqualified use.  After 2008, NQ use doesn't include any use after it stopped being the personal residence. I think all that will be taxable is the depreciation recapture.  Now you have to figure out how to make the software do that.

 

Quote

(C) Period of nonqualified useFor purposes of this paragraph—

(i) In general

The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.

(ii) Exceptions  The term “period of nonqualified use” does not include—

(I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,

 

[RitaB]

1 hour ago, Abby Normal said:

So I got to do my first one of these, where the home was used for more than 2 of the past 5 years, but rented for less than 3 years when it was sold.

First off, it was a bear getting ATX to magically show all of the hidden lines I needed, but after I figured it out, ATX wanted to make part of the gain, in addition to the depreciation amount, taxable. Is that right? I thought you just reduced the 250K per owner exclusion, which ATX did not do.

The total gain was about 30k. The deprec was about 9k. ATX used the percent of non personal use over the entire ownership period of about 23% time the 30k gain, or about 7k, and added to that the deprec of 9k for a 16k reportable gain.

Is ATX right?

No, it's not.  I had sale of residence converted to a rental earlier in the season.  I had converted the rental to personal use (they stopped renting, knew they were selling), and I have a feeling that might help you.  I entered the whole kit and caboodle on the Sale of Personal Residence tab. 

In general, (any reporting of a sale of residence on that tab), I don't know why ATX won't account for sales commissions incurred on the sale, but will increase basis by sales commissions incurred on your purchase.  (On the Sch D - they do show on the worksheet).  

[TAXMAN]

I found this to be true. On the worksheet it calculated it correctly to what I knew it should be. On the 8949 it however did not show correctly' Had to back force the worksheet to get it to come out right on the 8949 and the schedule d.

[RitaB]

19 hours ago, TAXMAN said:

I found this to be true. On the worksheet it calculated it correctly to what I knew it should be. On the 8949 it however did not show correctly' Had to back force the worksheet to get it to come out right on the 8949 and the schedule d.

Yes, I enter selling fees on 3b of the worksheet.  Print it.  (I go over it with clients.)  Then move the selling fees to a "cost" line to get the correct amount on 8949 and Sch D.