Sale of Converted Rental

[Sofia]

My client sold a Rental Property on 12/02/2020. The adjusted basis (purchase price + Improvements - Depreciation taken and allowed) =$327,500 (both building and land). The FMV at time of conversion was $240,000 (both  building and land). He depreciated the FMV of the building.  The depreciation taken was  $57,500 (years 2010-2019).

There are 2 basis:

the adjusted basis = $327,500

the converted basis = $200,000

He sold the property for Gross Amount = $319,000

Net Sales Amount after subtracting commission and expenses of Sale = $300,000

How do I report no gain and no loss in ProSeries?

Additional Questons:

Client did not rent the property in 2020 due to traveling distance, repairs being done and COVID. The client did not use the property in 2020 at all.

Do I report 0 rental days used and 0 personal days used? Can the client claim any expenses for the Rental in 2020 on Schedule E, such as Insurance, Property Tax, Mortgage Interest, Depreciation, etc?

If not, do I then report Mortgage Interest and Property Tax on Schedule A?

Any insight will be appreciated. Thank you, SILVIA

[Terry53029]

What was his basis at time of converting. You say he used FMV, but that may or may not be correct.

If the property was not available for rent, then no deductions, except on his personal schedule A. Can only take property taxes, and mortgage interest. You should research pub 527:

https://www.irs.gov/forms-pubs/about-publication-527

[TaxGuyBill]

---

@Sofia wrote:

He sold the property for Gross Amount = $319,000

How do I report no gain and no loss in ProSeries?

Additional Questons:

Client did not rent the property in 2020 due to traveling distance, repairs being done and COVID. The client did not use the property in 2020 at all.

---

The 1099-S will probably show $319,000 so you need to use that amount, as well as the amount of the depreciation.  A common way of doing is to 'make up' a Basis for reporting it.  The 'made up' Basis would be $319,000 plus the total amount of depreciation.  The result will be $0 gain/loss.

You may be able to enter it on the Asset Entry Worksheet.  There is a spot somewhere in the disposition area for 'Basis if different'.  If it is not working well there, you can just enter the sale date and leave the sale price BLANK.  Then manually enter the $319,000, total depreciation, and the 'made up' Basis on the "Enterable 4797".

A possible alternative would be to report the sale as it actually happened (using actual Basis) which would show a loss.  Then add a secondary sale using 'made up' numbers to show an equal amount of gain, resulting in a 'net' of $0 gain/loss.   Personally, I would go with the previous option, but either way should work.

Because there was no personal use and from what you said it seems like the intent was to keep it as a rental, personally, I would keep it listed as a rental.  The program might give errors if you enter 0 rental days, but if you enter 15 rental days it would get rid of the errors.  It is not ideal, but that is what I would do.  CAGMC.

If there is reason to believe it was not intended to be a rental, and was converted to personal use or just to a non-rental 'investment' property, then the treatment would be different.

[BobKamman]

It's kinda obvious from the conversion date of 2010 that FMV at the time was the correct amount to depreciate.  But for the sale in 2020, use the actual adjusted basis and the columns F and G on Form 8949 (Code L).  

Or maybe not.  Shouldn't it go on Form 4797?  Well, not if it ceased to be a rental before 2020.  Wasn't there anything in Covid legislation that would allow those deductions to be claimed anyway?  Maybe not.  Is the interest still deductible even if it wasn't a second home?  And too bad about property taxes, if he is already maxed out at 10K.  Some of those expenses would have been deductible as miscellaneous on Schedule A, but of course we had to give those up in order to give foreign investors a tax cut.

Don't make up phantom transactions trying to trick the IRS computers. Perjury only works until it doesn't. 

[Sofia]

The basis at time of converting was $360,000 (both building and land), and the FMV was $240,000 (both building and land)

Thank you for your input. SILVIA

[Sofia]

He never intended for this property to be changed to personal. He did not rent it in 2020 because of all the things going on (distance, not finding reliable property management co, COVID), and the repairs. He had a bad experience with the previous tenant. He was thinking of selling it, which he did in 2020, but wanted to make sure the repairs were done first.

Nobody s trying to make up phantom transactions, just do not know how to report no gain and no loss from this sale in ProSeries.