Gain/Loss on Sale of Rental Real Estate

[RickC]

Folks,

My client has the following scenario as described by Bill Bischoff on the website Market Watch on 10/12/19, concerning the sale of a property converted from primary residence to rental:

No tax gain or loss on sale.

1. Basis on conversion date under normal rule	$400,000
2. FMV on conversion date	$300,000
3. Post-conversion depreciation deductions	$17,000
4. Basis for tax loss (line 2 – line 3)	$283,000
5. Basis for tax gain (line 1 – line 3)	$383,000
6. Net sale price after selling expenses	$380,000
7. Tax loss (excess of line 4 over line 6)	N/A
8. Tax gain (excess of line 6 over line 5)	N/A

Conclusion: You have no tax gain and no tax loss — because the sale price is between the two basis numbers. Strange but true!

I understand the math, logic, and rules. Simple question: How do I report the situation on his 2019 tax return?

Thank you for the help!

--RickC

[TaxGuyBill]

Assuming there is a 1099-S, you sort-of need to use the number on the 1099-S as the Sales Price or else the client may get an IRS notice.

For the Basis, I make one up to make it work. Use (1) Sale Price PLUS (2) Depreciation as the Basis. Then when you enter that make-believe Basis, Form 4797 subtracts the depreciation, and the net result is zero. So in the example above, if the 1099-S shows $380,000, I would enter $397,000 as the Basis. Then Form 4797 subtracts the $17,000 of depreciation, and the result is $0 gain/loss.

Depending on how your software works, entering the difference (to zero it out) as "Selling Expenses" do the same thing.

[RickC]

Thank you, TaxGuyBill!

The "make-believe" basis was my thought as well, but it just seemed too easy and not very "official." I use ATX, and in its basis adjustment blank in the fixed asset sale screen, I entered the offset to yield a $zero gain/loss.

If anyone else has any more "official" ideas, or any other thoughts regarding ATX software input, I'd appreciate your input.

Thank you.

--RickC

[Lion]

Search for your topic on the UNofficial ATX message board: https://www.atxcommunity.com/index.php

[Anarchrist]

Yes, enter the adjustment in the adjustment field.

[RickC]

Thank you all,

Case closed, return filed, documentation archived.

--RickC

[Rapid Robert]

Yes, enter the adjustment in the adjustment field.

I looked on Form 4797 but could not find any "adjustment" field. [edit - maybe you were referring to the ATX input field referenced earlier, which of course is not part of the return sent to IRS].

"The "make-believe" basis was my thought as well, but it just seemed too easy and not very "official."

It is too easy, and it is not very "official", or even complete and accurate.

Form 4797 clearly is not designed to address this issue directly.

In order to allow efiling, the way I handled this when I had a client in this situation was to use Form 8275, and reference Regulation Sec. 1.165-9(b)(2) and Regulation Sec. 1.1011-1. This form is designed precisely for this type of situation, where you are disclosing a position consistent with the regulations. And it also allows you to reference the exact form and line number(s) involved, along with providing a written explanation. There is no chance this way that the IRS can miss the connection between your explanation and the amounts filed on the return, and the fact that you reference the regs involved helps show you actually know what you are doing. And it's been well established that Form 8275 does not raise any "red flags", in fact my experience in the dozen or so times I've used it is that it is never questioned.

[Anarchrist]

edit - maybe you were referring to the ATX input field referenced earlier, which of course is not part of the return sent to IRS

Yes, it's in the software.

[RickC]

Thank you Rapid Robert. I'll look into the 8275.