Removal of Asset From Form 1040 That Was Gifted to Relative

[doubleg10]

Data:

Client has been renting a house to her sister since 2004.  Adjusted basis is $30,000.  Client gifted the house to her sister on August 1, 2023.  Rental income and expense were reported for the 7 months on the tax return.  Form 709 is being filed as the FMV is above the annual exemption for gift tax purposes.

The house was actually "disposed of" during 2023.

The question is:

Is it proper to exclude the rental property from the return next year (2024)?  Would this cause the IRS problems (one year the property is there and the next year it is not -- no sales recorded in the year of disposition)?  Or is there a way to show it disposed of during 2023 that properly removes it from the reports (depreciation, etc.) that prevents the software from treating it as a sale with $0 sales price and creating a loss?

[TaxGuyBill · Accepted solution]

Correct, the 2024 return will not show the rental.  There is no need to show it disposed on the ACTUAL 2023 tax return.

But you do need to dispose of the Assets in the 2023 software to get the correct amount of depreciation.  On the Asset Entry Worksheet, enter the date it was gifted, but leave the sales price BLANK.  That will stop the depreciation.

[doubleg10]

Dear TaxGuyBill:

Thank you for the quick and very helpful response.  Keep up the great work.

Take care,

doubleg10