Allocation Between Land and Building When Selling Rental Home

[TaxNC]

Regarding a home owned and lived in for15 years and was rented out for only one year (four years ago with the appropriate depreciation taken), is it necessary to separate the land and building when sold in 2021? Thank you.

[Rapid Robert]

Yes, because the building but not the land is entered in Part III of Form 4797. Besides, if "appropriate depreciation" was taken, then this allocation was already done four years ago, so why wouldn't you use it?

You didn't ask, but be sure to take into account the non-qualified use when applying the Sec 121 exclusion.

[TaxGuyBill]

I would say no.

If it was still a rental, I would agree with Robert, it should be separated on the 4797 . But if I'm reading your post correctly, it was only a rental for a short time several years ago, then presumably it became their Principal Residence again. If that is the case, it would be reported on 8949/Schedule D, and I don't see any reason to separate it on the 8949/Schedule D.

[FEDUKE404]

I tend to agree with TaxGuyBill.
Absent more material facts, it sounds as if the situation is a (primary?) personal residence with a brief rental period somewhere along the way. I don't see it as sale of "rental property." I would just adjust the Sch D sale issues by the depreciation taken (agree with Rapid Robert that amount should be retrievable) and move on.

[Rapid Robert]

Depends what you mean by "short time". To be depreciable, I believe it must have been in service as a rental for more than one tax year, as property put in and out of service in the same year is not depreciable.

How will Section 1250 gain be properly reported if you simply put it on Schedule D, without Form 4797 first? And what about the period of non-qualified use to apply to the Sec 121 exclusion?

Granted, many tax professionals (including me) will take pragmatic short-cuts if they think something is de minimis, or if they think there will be "rough justice" (meaning the bottom line result is more or less the same either way), but that doesn't make it correct.

But the bigger question which only OP can answer is, why not separate the building and land? What is the problem that you think is being avoided by not doing so? The allocation was already determined for you when the depreciation was taken, wasn't it?

[TaxGuyBill]

How will Section 1250 gain be properly reported if you simply put it on Schedule D, without Form 4797 first? And what about the period of non-qualified use to apply to the Sec 121 exclusion?

There is no need for a 4797 to report the 1250 Gain. It still shows up on Line 19 of Schedule D. I suspect that most tax software has a home sale worksheet, that you can enter the depreciation and the information for Nonqualified Use.