Taxpayer sold personal residence that also has a cottage that has been rented out.

[nwtaxlady]

Taxpayer sold their personal residence which also had a cottage in the back that has been rented out. When I took on this client, the prior preparer had set it up as everything was allocated 25% for the rental & 75% personal residence. So I continued on that way. The rental portion was set up as 25% of the cost for depreciation. Now the client has sold the property. Remind you that it is all one tax lot with their personal residence and the cottage they have been renting out all these years.

My question is... How is this reported since the client told title company that yes part of it was rented and so they were issued a 1099-S for the FULL sale price. I want to know how to report it so that it matches.
Example, say it sold for $200,000. The 1099-S is for $200,000. That includes the personal residence also. I would take 25% of the $200,000 for the sales price for the cottage = $50,000. After depreciation recapture they do have a gain on the portion of the cottage rental. The rest is their personal residence that qualifies for the exclusion.

So would I put the sales price for the cottage rental as normally do on the form 4797 with $50,000. Then the other $150,000 on sch D with the personal residence exclusion? And will they match those 2 figures to the 1099-S of $200,000? Or is there some other better way to report it so it matches the 1099-S better?

[TaxGuyBill]

I think I would do it the way you suggested ($50,000 on 4797 and $150,000).

I would also include a note in the "preparer's notes". I would tell the taxpayer that there is a good chance they will receive an IRS notice on it, and if/when that happens just respond to it explaining how it was reported.

[Golden Rocket]

More Correct than you know

Taxlady, I think you have less to fear than you may imagine.

In fact, there was a few years ago (well before the days of the 8948) a reconciliation on Sch D which allowed the taxpayer to add all the 1099-Bs, 1099-DIVs, 1099-Ss, etc. and then reconcile them to the total sales reported on 4797s, 6252s, Sch D, etc. This tells me the govt still is aware that reporting of capital gains nature comes from multiple information returns and is reported on multiple tax forms. Maybe I'm giving them too much credit.

I wish the reconciliation still existed on the Sch D.

[TAXMANJACK]

Taxmanjack

I think I would do it the way you suggested ($50,000 on 4797 and $150,000).

I would also include a note in the "preparer's notes". I would tell the taxpayer that there is a good chance they will receive an IRS notice on it, and if/when that happens just respond to it explaining how it was reported.

Use the Schedule D "Worksheet for Sale of Home". You can just claim the depreciation taken, or use the form 4797 for a separate sale and use the
worksheet for the remainder.

[Burke]

So would I put the sales price for the cottage rental as normally do on the form 4797 with $50,000. Then the other $150,000 on sch D with the personal residence exclusion? And will they match those 2 figures to the 1099-S of $200,000? Or is there some other better way to report it so it matches the 1099-S better?

Yes. I would do it exactly as you describe. In fact, I have the exact same situation with a client.