Reporting the sale of a rental property involves understanding capital gains, depreciation recapture and specific tax laws. The sale may not seem that complicated, but there can be unexpected tax liabilities the client didn’t consider.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: How do you handle a sale of a property that was first personal, then rental, and then moved back to personal use?
A: The rental period counts as nonqualified use. Additionally, any depreciation taken during the rental period is taxable to the extent of gain on the sale and cannot be excluded under the §121 exclusion rules.
Q: If §121 excludes all taxable income from the sale, does the taxpayer still need to report it on their tax return?
A: No. If the taxpayer meets the §121 ownership and use requirements and did not claim depreciation on the property, they do not need to report the sale on Form 1040.
Q: What if the rental room is part of an apartment that the person does not own? Is depreciation allowed?
A: Depreciation cannot be claimed on property that the taxpayer does not own.
Q: What happens to suspended passive losses if the rental property becomes the taxpayer’s primary residence?
A: The suspended passive losses remain suspended until the taxpayer either sells the property or their adjusted gross income (AGI) allows them to take advantage of the special $25,000 passive loss deduction.
To learn more about reporting the sale of rental property, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.