Sale of Residence After Rental

[JohnH]

Taxpayers bought home in Jul 2006 for $130K.
They listed the home for sale when they bought a new home in May 2009.
Original home didn't sell, so they converted it to a rental.

The original home was rented from Jan 2010 - Apr 2011, when it was sold for $120K and a 1099-S was issued to them.

Depreciation claimed during the rental period was $4,500.
Is the entire $4,500 excludable?

My worksheet say it is excludable, but ATX is trying to tax the $4,500. I'm wrong somewhere - trying to figure out if my worksheet is wrong or if I'm checking the wrong boxes in ATX.

[erchess]

Ttb 6-22

Seems to me to say that exclusion of the depreciation is not allowed. I think they're stuck with that much tax out of the deal. Look at the bright side, they had the rental income reduced by that amount before the sale. I don't know where you got your worksheet but there's one in TTB you could use.

[JohnH]

I'm using the worksheet in The Tax Book. I can see how there is taxable income if there's a gain on the sale, even though the gain itself is excludable under Sec 125.

What I'm struggling with is the fact that there is a loss on the sale. Seems to me this is the same situation we would see if someone purchased a rental property, depreciated it over a year and a half, and then sold it at a loss greater than the accumulated depreciation. There would be no taxable income in that situation.

[Possi]

Taxwise

Taxwise has a Sch D worksheet, page 2 where I input the same situation, and it worked fine. Maybe ATX has the same thing?
"Sch D Wksht 2" is what it is called, but I had to use the "interview" sheet and check the box for sale of your home, just to get the worksheet to come up.

[JohnH]

Thanks for checking, Possi. So are you saying you came up with neither taxable income nor a deductible loss? If that's correct, I'm going to force ATX to come to the same result and figure out what I'm doing wrong in the program after the 15th.

[Lion]

Depreciation taken cannot be excluded from a gain on sale of house, if still qualifying as principal residence. No gain, no tax on depreciation.

[Possi]

Correct

Thanks for checking, Possi. So are you saying you came up with neither taxable income nor a deductible loss? If that's correct, I'm going to force ATX to come to the same result and figure out what I'm doing wrong in the program after the 15th.

That is what I came up with.