How to account for homeowner capital gains exclusion for a rental property on Freetaxusa?
We sold a property that qualifies for a $250k capital gains tax exclusion. This property was a home for several years, after which it became a rental property.
- We have tracked the property's depreciation while we rented it, and we know that up to 25% of this depreciation will be recaptured.
- The property sold in 2023 and the homeowner tax exclusion should still apply.
However, I do not see a way to enter the sale of this rental property that also accounts for the homeowner tax exclusion on Freetaxusa. Have I missed it? Could you advise? Thanks.
Best Answer
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Unfortunately, our software does not support this exclusion when a home has been used as both a personal residence and also as a rental property. We do hope to be able to support the partial exclusion in future tax years, but for 2023 and previous tax years, we don't. I'm sorry for the inconvenience.
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[deleted]
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Thanks, I appreciate the answer.
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what about 2024?
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Hi abhirkmv,
Thank you for asking! Yes, starting for the 2024 tax year, we do support the partial exclusion of a home sale that was your main home, then converted to a rental before it was sold.
To report this in your account, go to Income > Rental Income (Schedule E). On the Depreciable Assets screen for your rental property, indicate the day the home was sold. When asked "What happened to your home?" select the option: "Sale is a rental that was also your home." Finish going through those screens to answer questions about the rental. On the last screen for your depreciable asset, you'll see this alert:
"Because you sold your home you'll need to report the sale of your home elsewhere on your tax return.
If this is your main home report the sale on the Home Sale screens in the Uncommon Income section of the software."
After you have finished going through the depreciable asset screens, go to Income > Uncommon Income > Sale of Main Home to enter information for the exclusion.
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I have followed the above as I'm in a similar situation; however, the Form 4797 that is produced by the software does not fill in Line 1: "Enter the gross proceeds from the sales or exchanges reported to you for 2024 on Form(s) 1099-B or 1099-S."
My concern is that because the form (correctly) breaks down the sale of rental property into land (part 1) and property (part iii), nowhere is the amount that is actually reported on my Form 1099-S reported on the tax return. I believe it should be reported in Line 1a.
My property was my personal home that I turned into a rental property due to military moving (I qualify for exclusion based on 2 out of 5 years primary residence with 10 year 'stop the clock' rule for military). I'm still a bit confused as to whether to report on Form 8949 or Form 4797, but after experimenting, it seems both are options and result in the same tax/result. It seems that if it is considered an investment, Form 8949 is the more correct option, whereas if considered a business, Form 4797 is the more correct option.
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If reported on Form 8949, it reports the sale price correctly from the 1099-S; however, using Form 4797, as stated above, it does not report the full sale price anywhere and I'm not sure if this would raise flags with the IRS.
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