2003 Tax Help Archives  

Sale or Trade of Business, Depreciation, Rentals

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11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges


What form(s) do we need to fill out to report the sale of rental property?

The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses, is often used in conjunction with Form 4797. For further information, refer to Publication 544, Sale on Other Disposition of Assets,Publication 550, Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and the Instructions to Form 1040, Schedule D, Capital Gain and Losses.

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We are selling rental property and have never claimed depreciation. What do we do about this when we file our taxes?

When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken. For more information refer to Publication 544, Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.

If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting Method, to claim the depreciation that should have been taken. The Form 3115 must be timely filed for the same tax year in which you sell the rental property or an earlier tax year. If you placed in service the rental property only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to take deductions for the claimed depreciation.

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I am selling my rental property and was asked to pay the buyer's closing costs. Is all or part of the costs deductible for me?

In computing your gain or loss on the sale, reduce your proceeds from the sale by your selling expenses, including the buyer's closing costs that you agree to pay. Refer to Publication 544, Sales and Other Dispositions of Assets, for additional information.

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How do I file the gain on an installment sale of business property in each year? What form do I use?

Use Form 6252 (PDF), Installment Sale Income, to figure your installment sale income each year. This form does not account for taxable interest income from the sale that needs to be reported each year by the seller, usually on Form 1040, Schedule B (PDF), Interest and Ordinary Dividends.

You may also need Form 1040, Schedule D (PDF), Capital Gains and Losses, and Form 4797 (PDF), Sales of Business Property. For additional information including forms and instructions, refer to Publication 537, Installment Sales

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What forms do we file to report a loss on the sale of a rental property?

The loss on the sale of rental property is reported on Form 4797 (PDF), (Sale of Business Property) as ordinary loss.

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I sold a rental property in which I had previous years' loss carryover due to the loss limitation rules. Can I recover the total carryover since the property has been disposed of?

The losses (but not credits) that have not been allowed from your rental property in previous years including the current year generally are allowed in full in the tax year you dispose of the entire interest in the property.

More than one form or schedule may be required for reporting the loss. See Publication 525, Passive Activity and At-Risk Rules and Publication 544 , Sales and Other Disposition of Assets for information on the reporting of the sale of activities with unallowed losses.

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Can you sell rental property and reinvest it into rental property without paying capital gains tax?

No. A deferred exchange will be treated as a sale rather than a tax free exchange if the taxpayer actually or constructively receives money on other property in full consideration of the relinguished property. However, rental property may be exchanged directly for other rental property of like kind. Gain realized from such an exchange is deferred. For additional information on like-kind exchanges, refer to Publication 544, Sales and Other Dispositions of Assets.

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I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?

What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. Deferred exchanges will be treated as a sale rather than an exchange to the extent that the taxpayer actually or constructively receives money or other (not like kind) property in exchange for the like-kind property given up. For more information refer to .Publication 544, Sales and Other Disposition of Assets , and Form 8824 (PDF) Instructions, Like-Kind Exchanges .

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We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gain into another like-kind property. How do I report this transaction on my tax return?

Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.

If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.

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Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?

You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523, Sale of Your Home.

However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)

The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523, Selling Your Home.

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I just sold a commercial rental property my wife and I had purchased thirty years ago (before she passed away) and I want to know how to figure my cost basis. Is it the full appraised value at the time of her death, or is it just half?

The answer depends on in which state you live in. Generally, the basis of property you inherit is its Fair Market Value (FMV) at the date of the decedent's death. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and inherit your spouse's interest in a property held as community property, then the basis for the entire property becomes the FMV at the date of your spouse's death. This also assumes that at least half the value of the community property interest is included in the deceased spouse's gross estate. In other states, where the property is owned by you and your spouse as joint tenants, tenants by the entireties, or tenants-in-common, the basis of the one-half that your spouse owned would be increased to one-half of the FMV of the property at the date of death. The basis in the one-half that you owned would remain at the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally, subject to all future routine basis adjustments until the property is either sold or otherwise disposed of.

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