Conversion of rental property to personal use

[BJB61]

Property was converted from rental to personal use on 4/30/22.  Turbo Tax premier is calculating proper depreciation for partial year and there is small net rental income after expenses for the year.  It is also showing a disposition of the rental house on Form 4797 with 0 proceeds less the total depreciation taken over the years and it is allowing a current year loss to the extent of the net rental income.  This does not seem right to me that a disposition will be reflected on Form 4797 since the rental property was not sold, and moreover that any loss on sale of a property would be allowed.

[MaryK4]

Because the property was converted to Personal Use and not sold, there has not been realized gain/loss yet.  The Form 4797 is Disposition of Business Property, which includes the conversion to personal use.  (It closes out the Schedule E for reporting).  When you sell the property, you will have to account for the depreciation to determine the gain or loss (essentially it is suspended).  

[BJB61]

Thank you!  While I was aware the realized gain computation, and the impact of the depreciation taken (recapture) was suspended until the property is actually sold, I couldn't figure out why the current year rental income was offset by a loss flowing from Form 4797 this year.  I don't fully understand what the Form 4797 loss represents this year.

[DianeW777]

Let's review your steps.  Based on your question it seems there may be a question that has not been answered correctly when showing the conversion from rental to personal use without any sale. 

Key Question:  Special Handling: be sure to answer "Yes" for Special Handling Required. This assumes those unsold assets were converted to personal use, and results in no gain or loss for the disposition.

When you are in the rental activity for 2022, you must select the 'Assets' section, then in each asset you must go to the screen titled 'Tell Us More About This Rental Asset'. 

1. Once you reach this screen for each asset, you must select 'This item was sold, retired, stolen, destroyed, disposed of, converted to personal use....' 
2. Next enter the date you stopped using the asset for rental purposes. And answer 'Yes' you always used this asset 100% of the time for business. (The percentage of use doesn't change until after conversion from rental to personal use.)
3. Select 'Yes' for Special Handling due to 'You converted the asset to 100% personal use'.

You may see some depreciation expense which will be the partial year amount.  For the period of the year it was available for rent, you may have some expenses which are allowed for that open period.  

Keep all of these records because you will need them when and if you sell this home. All depreciation will be recaptured at that time, regardless of how long you hold the property for personal use. The records are necessary until you completely dispose of or sell the property.

Once you make this change you will not see a sale reported on Form 4797.  

@BJB61

[Edited: 02/13/2023 | 6:59a PST]

[BJB61]

I am using Turbo Tax Premier that I downloaded to my PC.  The screens I am seeing are slightly different than you've shown.  I have a screen asking if any of these situations apply to this property, with one situation being converted to this property from a rental to personal use in 2022 and I checked that box.  The next screen asks if the property was rented for all of 2022 and I checked No and entered 120 days for # of days rented and 0 personal use days entered.  I have been thru the "Assets" section numerous times reviewing the screens.  On the Did you stop using this asset in 2022, I've selected the Yes icon.  On the next screen I entered the date of sale or disposition as 4/30/2022.  The next screen asks if special handling is required and I again clicked the Yes button.  The next screen tells what the depreciation deduction for the rental house is for 2022 and says it will be transferred to the correct form.  The only button is "Continue" and that takes you back to the property assets screen.  The Form 4797 is still populated with a date sold of 4/30/200 and a loss, showing 0 as proceeds, total accum depreciation taken since acquisition and the cost basis of the house.  The loss amount shown in column g is the exact amount of net income from the rental property this year.  I don't feel this is correct, but I have been thru these steps numerous times.  I cannot find a way to get rid of the 4797 loss.  I'm afraid there is a programming error in this situation.  I don't feel comfortable filing the return this way.

[KrisD15]

This entry is very tedious.

Since you are converting the rental to personal, there should be no 4797, only a Depreciation Schedule. 

You will recapture the depreciation when you sell the house. 

The exception would be if you took any Bonus Depreciation or Section 179 Deduction on any of the rental assets. 

If you ONLY have the building and land, there will be no 4797. 

Your Rental "Property Profile" should be completed or carried over from your last years return. 

Go through this interview

First is information, such as address

Continue

Select Type, such as Single family

Continue

Select CONVERTED  (the second option) and check the box for "I converted this property from a rental to personal use in 2022."

Continue

Select "No, this property was not rented all year"

Enter number of days rented and 0 Personal use

Continue

Yes, I owned 100%

Continue

Select yes or no to being an Active participant

Continue

Did you pay anyone $600?

Continue

Enter my rental info myself

Continue

None of the above

Continue

Next, enter the income you received.

Move to Assests/Depreciation 

Start or Update

Yes, I want to go to my asset summary

Continue

Click Edit next to the rental 

Select Rental Real Estate Property

Continue

Select Residential Rental real Estate 

Continue

Enter the cost and date purchased

Continue

select BOTH "I purchased this asset" AND "The item was sold, retired, stolen, destroyed, disposed of, converted to personal use..."

Enter the end date 

Continue

Accept the depreciation and continue

Special handling Required? 

YES

Depreciation for 2022 is listed on screen

Continue

Done

Answer the remaining interview questions 

Screen shows Profit or loss 

In your forms, you should have Schedule E showing the loss (if 2022 Depreciation was more than rental income) 

and 4562 Depreciation and Amortization Report, but no 4797

Keep the depreciation report with your tax file and use to recapture depreciation when you do sell. 

[BJB61]

I totally agree there should NOT be a 4797 in my return.  I have been thru this Rental section at least a dozen times being careful each time.  I just went thru it again step by step reading your directions as I went thru it.  My screens differ from yours slightly.  For instance, I don't have the screen that is titled "Tell us more about this rental asset" in which I can select BOTH "I purchased this asset AND the item was sold, retired, stolen, destroyed, disposed of, converted to personal use..."  Likewise, I don't have the info on the bottom of that screen regarding "Have you used this item 100% for business since you acquired it and the date you first started using it for business."  Instead, I have a screen that says "Did you stop using this asset in 2022 for business purposes.  Select Yes if item was sold, stolen, destroyed, converted to personal use, given away, taken out of service for any other reason."  I selected Yes.  The next screen has Date of sale or disposition in which I entered 4/30/2022 and Date acquired which was pre-populated from prior years' returns (5/1/2007).    I indicated Special handling was required by selecting Yes.  The net profit ends up being $2,070.  Form 4797 is still showing.  Part 1, line 2 lists rental house with date acquired and date sold as listed above.  Gross sales price is listed at 0 and depreciation allowed is the total depreciation taken thru 2022.  Cost is listed and Gain or loss listed is -$2,070.  I.e. loss to the extent of this year's rental income is being allowed.  This loss is flowing to Part II of Form 4797, lines 11, 17 and 18b, and then flows to the 1040.   I don't know why my screens are somewhat different than you present, but my screens seem to be gathering the same info yet the 4797 still remains.  However, the fact that my screens differ from what you present may indicate why the program isn't working like you indicate it should in my case.  Why are my screens not exactly the same?  And, why isn't the software working correctly in my case?

[DianeW777]

You are working with the TurboTax CD/Download version and there is a slight variance in the screens.

You do need to check 'YES'  that you have always used this item 100% of the time for business (until it was converted). You have already placed the correct conversion date and marked the appropriate boxes. Once you answer 'Yes' to the 'Special Handling' you will see the depreciation deduction for 2022.  There is no need to answer yes to personal days because there were no personal days during the rental period.  TurboTax knows how to calculate the depreciation for 2022 based on the conversion date.

NOTE:  If you had at some point said 'NO' to Special Handling be sure you select that again to go through and remove any data that might be there.  Finish until you reach the 'Your Property Assets" page again.  Select your assets and go to that screen again to say 'YES' to Special Handling'. This was tested and the Form 4797 was removed from the list of forms.  See the images below.

@BJB61 

[BJB61]

This is still not getting rid of Form 4797.  My screens never ask me the question if I've always used this item 100% of the time for this business.  The closest my screens come to this question is the screen that comes up first for each asset when you click Edit.  That screen asks you to verify info transferred from the 2021 return -- description, date, asset type, cost, land, Business %, prior depreciation.  I have 100% for business use for every asset.  The next screen asks "Did you stop using this asset in 2022 (with one of the reasons listed being converted to personal use)?  I have entered Yes for each asset, but that screen doesn't have a place to indicate I purchased this asset, unlike your screen.  The next screen asks for the date of sale or disposition for which I've entered 4/30/2022 for each asset.  That same screen also lists the date acquired and 5/1/2007 is listed for each asset.  The next screen asks if special handling is required and I've indicated Yes for each asset.  It then tells me how much depreciation has been calculated and I agree with that calculated amount.  I agree with the net rental income calculated for the year.  My problem is that the Form 4797 still remains and is allowing a loss equal to the rental income amount for 2022.  This makes no sense to me.  I have been through all the rental activity screens time and time again.  The software is not working in my case.  I am very disappointed with the software after using it for over 15 years.  The worst part is I don't know how to get this resolved as I don't want to file a return indicating there was a disposition of this property.  

[DianeW777]

If you would like us to take a look at your return that might be helpful for you.  You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

TurboTax Online:

Go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
5. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

TurboTax CD/Download:

If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:

1. Click on Online in the top left menu of TurboTax CD/Download for Windows
2. Select 'Send Tax File to Agent'
3. Write down or send an image of your token number then place in this issue.
4. We can then review your exact scenario for a solution.

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution. 

@BJB61 

[BJB61]

Thank you.  My token # is 1073056.

[DianeW777]

Thank you for the token.  Here are the steps I used to remove the 4797 from your file.

I noticed you said that it was not rented all year under the Property Profile.  Change that answer to 'Yes' because it was rented until you removed it from service and at fair rental price. TurboTax knows how to handle that with the removal date in each asset.

1. Go 'Asset/Depreciation' then select each asset to change your answers. First say 'Yes' to 'Did You Stop Using This Asset in 2022?' so that you can remove your dates (delete each date field, Date of Disposition and Acquired Date).  Also say 'No' to Special Handling'
2. Next go back to say 'No' and continue until you are back to the list of assets - do this for each asset
3. I tend to Review your return after each action.
4. Now go back to each asset and do the reverse except do NOT enter the 'Acquired Date' on any asset. TurboTax knows the answer to that. Enter ONLY the 'Date of Disposition'.
5. Review your return to see the 4797 is removed.  The rental income is there on Schedule E and Schedule 1, but the 4797 is now removed.

Please let me know if that works for you.  

@BJB61 

[BJB61]

I tried to follow all your instructions but the 4797 is still there.   After I said Yes to "Did you stop using this asset in 2022" and I removed the dates (both disposed and acquired), I wasn't asked the question about Special Handling required, so I couldn't say No at that point.  After I got thru all the assets with all the disposition dates removed, the 4797 was not there but with the software figuring depreciation for the entire year I no longer had net rental income for the year, but rather a loss that is disallowed.  That is probably why the 4797 disappeared since when it appears it is allowing a loss to the extent of the rental income.  After removing the disposition dates on all the assets and I went back into the first asset (the rental house) and put back in the disposition date such that the depreciation amount went down substantially, the 4797 re-appeared -- even after only 1 asset being changed to reflect the disposition date since at that point I had net rental income again.  The 4797 was then allowing the loss to the extent of the net rental income at that point.   I don't know why after I said Yes to Did you stop using the asset in 2022 and I removed both the disposition and acquisition date, I didn't get the No to Special Handling question that you said I would.  Perhaps that is the problem now.

[DianeW777]

When following my steps the 4797 was completely removed.  I would ask that you start fresh to follow my instructions to remove the data about sale, then run the following instructions before you start to review each asset again. Check Forms mode to be sure Form 4797 is gone. If that doesn't work, you may need to contact us.

Clear your cache and cookies. It handles many issues that seem nonsensical on a regular basis. 

• Close your TurboTax return first.

Watch to be sure you are selecting 'all time' as example.  Do not use selections like 'last hour' for those browsers that give  you options.

• How to clear your cache

Start the steps again beginning at #4.  Remember  you must say 'Yes' to 'The item was sold, retired,...... etc.) then enter the date retired.

If after this process, if you are still having the same experience reach out by using the link below.

• TurboTax Contact Information

@BJB61