Sale of rental property converted to personal in year of sale

[Roddog]

client has a property that’s he owned for 20 years and was rented for 8 years up until end of 2016. No end of rental claimed on schedule E at end of 2016 or 2017.

The property was not rented in 2017, the client remodeled the home and I believe this would be considered as personal use. He later sold the property in May 2017.

The mortgage and taxes are being written off on schedule A, no expenses are allowed because of no rental use and the property was not available for rent during this time. The client has another home he’s living in also.

I’m confused on using 4797 part III or just schedule D home sale to report the sale of the property? The property was not rented or offered for to rent in 2017 and used to remodel and prepare for sale. I know we have to add back depreciation claimed in both cases. The property was put on market in April.

2. Also, am I required to file an schedule E to show property was not rented in 2017 and end rental terms?

[DaveinTexas]

Publication 946

Honestly, this might be a tad aggressive, but I would say the depreciation should stop when "you retire it from service, even if you have not fully recovered its cost or other basis." That quote is from Publication 946. It goes on to state retiring from service or permanently withdrawing it from use in a trade or business would mean selling it or abadoning it.

I would stop the depreciation as of the end of 2016 and report the sale on Form 4797 listing the original cost, plus the improvements, plus the closing costs on the sale, minus the accumulated depreciation to tax year 2016. If the IRS fusses, the client needs to be able to prove the property was not in livable condition and certain repairs took longer than expected to explain the gap in rental activity.

Another, more aggressive approach, would be to amend or report on the original 2017 return a full year's worth of rental expenses (mortgage interest, property taxes, insurance, etc) and, if applicable, setup the improvements for straight line (slow) depreciation. If certain improvements qualify for bonus depreciation (less than 15 year property), just depreciate those using straight line depreciation for their useful life, and elect out of bonus depreciation. No use taking a deduction for something the client would be required to recapture the following year. You can always allocate the "personal" use of mortgage interest and other deductions; put a portion on the Schedule A and the remainder on the Schedule E. Some might even tell you the interest is Investment Interest, subject to limitations. That is probably the more accurate route to take.

The justification is the property was available for rent, hence the Schedule E, but tell the client to be prepared to prove the property's availability to rent (advertising? leasing agent hired? Craigslist?). Then, report the sale in 2018 on a form 4797 like listed above.

[Burke]

The justification is the property was available for rent, hence the Schedule E, but tell the client to be prepared to prove the property's availability to rent (advertising? leasing agent hired? Craigslist?). Then, report the sale in 2018 on a form 4797 like listed above.

Judging from previous posts (this is the third one by the poster on the same situation) it sounded like it was not available for rent as it was being remodeled as of early 2017 and then was sold in April that same year.

[Kram BergGold]

My Approach

The tax will be the same if reported on D or 4797. You will make the same basis adjustments and have the same amount of unrecaptured 1250 gain. I would report it on D. I would not include a Schedule E. If there are suspended passive losses just make sure you trigger them.