USA 4797 conundrum - sale of residence converted to rental property


Joined
Oct 13, 2009
Messages
15
Reaction score
1
Based on your numbers, you have a reportable gain. The fact that your sale price is between FMV and original price is irrelevant. In my case, my sale price was between FMV and adjusted basis so there was neither a loss nor a gain.

SALE PRICE: $325k
ADJUSTED BASIS: $357k + $20k - $56k = $321k
GAIN: $325k - $321K = $4K

Since you sold a depreciable property (i.e., subject to Section 1250 recapture), you must report the sale in Part III (see item 1(a) in the table on page 1 of Form 4797 instructions). And since your gain is less than depreciation, the entire gain is taxed as regular income, not as a capital gain.

HOWEVER, you're supposed to separate the land from the building when reporting the sale.The land always gets listed in Part I (or Part II if sold in less than a year). You must be able to substantiate the land value or ratio you use for reporting the sale (typically from appraisals or property tax valuations).

This may work to your advantage if the land appreciated from 2006 and 2020. For example, if land represented $35k of the original cost and $40k of the sale price, the land would show a $5k gain and the building would show a $1k loss. In this case the building gets reported in Part I since it showed a loss (the building only gets reported in Part III if it has a gain!). In this example, you would have a $4k long term capital gain. The capital gains tax rate is either 0%, 15% or 20%, depending on your tax bracket. Capital gains are only taxed as regular income if the depreciable asset has a reportable gain.
 
Ad

Advertisements

Joined
May 6, 2021
Messages
6
Reaction score
0
Country
United States
Based on your numbers, you have a reportable gain. The fact that your sale price is between FMV and original price is irrelevant. In my case, my sale price was between FMV and adjusted basis so there was neither a loss nor a gain.

SALE PRICE: $325k
ADJUSTED BASIS: $357k + $20k - $56k = $321k
GAIN: $325k - $321K = $4K

Since you sold a depreciable property (i.e., subject to Section 1250 recapture), you must report the sale in Part III (see item 1(a) in the table on page 1 of Form 4797 instructions). And since your gain is less than depreciation, the entire gain is taxed as regular income, not as a capital gain.

HOWEVER, you're supposed to separate the land from the building when reporting the sale.The land always gets listed in Part I (or Part II if sold in less than a year). You must be able to substantiate the land value or ratio you use for reporting the sale (typically from appraisals or property tax valuations).

This may work to your advantage if the land appreciated from 2006 and 2020. For example, if land represented $35k of the original cost and $40k of the sale price, the land would show a $5k gain and the building would show a $1k loss. In this case the building gets reported in Part I since it showed a loss (the building only gets reported in Part III if it has a gain!). In this example, you would have a $4k long term capital gain. The capital gains tax rate is either 0%, 15% or 20%, depending on your tax bracket. Capital gains are only taxed as regular income if the depreciable asset has a reportable gain.
Thank you Developer. I do appreciate you taking the time. Everything you wrote makes total sense now. One thing I did forget was the closing expenses $30k. So it does change the number. $351k Adjusted Cost basis.
 
Joined
Oct 13, 2009
Messages
15
Reaction score
1
OK, then you have no reportable gain or loss, as you originally stipulated. Wish you hadn't forgotten the closing costs :eek:

In that case, you would list the sale in Part I and change the basis (column f) so that the gain/loss is zero. Keeping in mind that I'm not a tax pro, I think you'd be OK to list the sale as a single asset in this case (for simplicity's sake). In fact, none of the examples for reporting real estate sales provided in the Internal Revenue Code separate land and building (see Section 1.165-9), even though 4797 instructions suggest otherwise! (see last paragraph in left column on page 2).
 
Joined
May 6, 2021
Messages
6
Reaction score
0
Country
United States
OK, then you have no reportable gain or loss, as you originally stipulated. Wish you hadn't forgotten the closing costs :eek:

In that case, you would list the sale in Part I and change the basis (column f) so that the gain/loss is zero. Keeping in mind that I'm not a tax pro, I think you'd be OK to list the sale as a single asset in this case (for simplicity's sake). In fact, none of the examples for reporting real estate sales provided in the Internal Revenue Code separate land and building (see Section 1.165-9), even though 4797 instructions suggest otherwise! (see last paragraph in left column on page 2).
Yeah I know sir, I'm getting old, missed those closing numbers

. Well, I sure do appreciate this forum.... As I was leaning on doing it on part 3...and leaving it at zero (based on HR blocks call center, who didn't understand anything at first) I searched and searched and could not get an answer on how to fill the form out. I am going to go with your suggestion and add a note. Note sure what else I can do. They should write better instructions

Thanks again Developer.

Have a blessed weekend.
 
Ad

Advertisements

BIG E

VIP Member
Joined
Dec 19, 2020
Messages
105
Reaction score
14
Country
United States
$ 209 + $ 20 - $ 56 = $ 173

Sales Price $ 325 looks to me like you have a gain of $ 152

Once you convert property to rental - basis is lower of cost of FMV on date of conversion
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top