Looking for some 2023 Tax Return preparation help

[aja8888]

I sold my house for $377,000 in June 2023 after my wife passed away in late 2022. We bought the house in November 2013 for $209,000. My realized gain on the sale is $168,000 which excludes me from paying capital gains tax on the sale (<$250,000 for single filer).

In that house, I used a “home office” for four years starting 2014 and claimed the business deduction that was figured by Turbo Tax each tax year. It looks like I made claims for 2014 through 2017, when I shut my consulting business down. I think TurboTax (TT) used the “simplified method” in figuring the deduction as I don’t see that much detailed data in the worksheets (my old saved tax returns). In total, I received home office deductions of $3,240 over those years (4).

When using TT to create my 2023 tax return now, in the reporting of the house sale section, for "business use of the home" reporting they ask for the following:

Depreciation after May 6, 1997 ____________
AMT Depreciation after May 6, 1997_________

I am not clear as to what to put in these boxes, or if I am to put in the $3,240 in just one or both. Or do I put a percentage (depreciation) type number? The “Help” instructions really don’t help and refer me to IRS publications. I looked at the IRS publication and it is very long and confusing. (maybe I am getting too old to comprehend this stuff anymore).

In addition, IRS and TT instructions list reasons NOT to report the sale of the home if certain conditions are met (No 1099S received, gain on sale is excluded, etc). It looks like I meet these conditions.

Questions:

1.Should I NOT report the sale of the home since I am way under the reportable capital gain and seem to meet the other criteria?

2. Do I put the $3,240 expense deductions for the home office in one (or both?) of the boxes in the worksheet and report the sale even though my basis has been reduced, but not enough to trigger a reportable capital gain?

3. Should I do #2 above and not report the sale of the house and just keep records in case I am challenged in the future?

4. What am I missing here?

As always, thanks in advance for any advice rendered!

 

[Sunset]

I'm not a tax expert:

If you didn't claim depreciation of part of the house, and only a portion of the expenses of a house (example: claimed for the office that is 5% of house size, 5% of electricity, heat, water, property taxes) then there would be no depreciation involved.
[-]Based on the size of your deduction over 4 years of just over $3K, I don't think you took depreciation on the house.[/-]

edit: Updated as pointed out below by Cathy63, it's a percentage of the house on the depreciation number as well.

 

[target2019]

Not a tax expert either. But I will ask one tomorrow.

I think you were using the home office deduction, the simplified method, rather than actual depreciation.

Q20. What effect does using the simplified method have on the requirement to recapture depreciation when the home is subsequently sold at a gain?
A. For taxable years in which the simplified method is used, the depreciation deduction allowable for the portion of the home used in a qualified business use is deemed to be zero. Accordingly, you do not have to recapture any depreciation for taxable years in which you used the simplified method. However, you may have to recapture depreciation for taxable years in which you used the standard method.

https://www.irs.gov/businesses/smal...s-simplified-method-for-home-office-deduction

 

[cathy63]

So first thing is that you actually get a $500K exclusion because you sold your main home within two years of your spouse's death. It doesn't make any difference here, but just mentioning it in case anyone else looks at this thread in the future.

You do have to recapture the depreciation for the portion of the home that was used as the home office if you took it. The depreciation is what you deducted during those four years. Each year you deducted a percentage of 1/39th of the home value (not the land value, just the house). $3240 sounds reasonable assuming you used a small percentage of the house and you may not have taken the full year's deduction in the first and last year of your business.

If you have to recapture the depreciation, you do need to report the sale of the home. It should end up on an 8949 with a code H in column f and $0 gain. The $3240 is ordinary income.

Without having gone into TurboTax myself and looked at the exact screen you're referring to, I think you should go ahead and put $3240 in both boxes. You're not going to be subject to AMT anyway, so the second one isn't going to be used.

 

[aja8888]

So first thing is that you actually get a $500K exclusion because you sold your main home within two years of your spouse's death. It doesn't make any difference here, but just mentioning it in case anyone else looks at this thread in the future.


Interestingly. is that TT doesn't ask the question about how long after my wife passed did I sell the house. EDIT: Found it in the forms worsheet. Boy, this section is confusing.

You do have to recapture the depreciation for the portion of the home that was used as the home office if you took it. The depreciation is what you deducted during those four years. Each year you deducted a percentage of 1/39th of the home value (not the land value, just the house). $3240 sounds reasonable assuming you used a small percentage of the house and you may not have taken the full year's deduction in the first and last year of your business.

If you have to recapture the depreciation, you do need to report the sale of the home. It should end up on an 8949 with a code H in column f and $0 gain. The $3240 is ordinary income.

Without having gone into TurboTax myself and looked at the exact screen you're referring to, I think you should go ahead and put $3240 in both boxes. You're not going to be subject to AMT anyway, so the second one isn't going to be used.

Thanks for the explanation.

I did take a small percentage of the house in square feet use (the office). I would be more clear if TT had a better help section on this. They really leave you hanging. Using the word "depreciation" leads one to believe that the dollar expense deduction is not what is needed there.

The business deduction in dollars is partly based on the gross receipts (varied each year) I think, and the year breakdown on my old tax returns is as follows:

2014 - $720
2015 - $800
2016 - $720
2017 - $1,000

Total = $3,240

 

[REWahoo]

"Looking for some 2923 Tax Return preparation help"

^ While I encourage planning ahead, getting a 900 year jump on your taxes seems quite a stretch.

 

[aja8888]

"Looking for some 2923 Tax Return preparation help"

^ While I encourage planning ahead, getting a 900 year jump on your taxes seems quite a stretch.

Ah, the fat finger of old age got me! maybe a MOD can fix this (I can't anymore).

 

[MichaelB]

Ah, the fat finger of old age got me! maybe a MOD can fix this (I can't anymore).

Fixed. I thought it was just an optimistic outlook

 

[aja8888]

Fixed. I thought it was just an optimistic outlook

I hope I am around to fill that tax return out, and be able to do it myself!

 

[cathy63]

Thanks for the explanation.

I did take a small percentage of the house in square feet use (the office). I would be more clear if TT had a better help section on this. They really leave you hanging. Using the word "depreciation" leads one to believe that the dollar expense deduction is not what is needed there.

The business deduction in dollars is partly based on the gross receipts (varied each year) I think, and the year breakdown on my old tax returns is as follows:

2014 - $720
2015 - $800
2016 - $720
2017 - $1,000

Total = $3,240

Did these numbers come from line 30 of the Schedule C you filed in each of those years? To the left of line 30, there are two blanks for square footage of the home and square footage used for business. If those are filled in, then you used the simplified method. I'm thinking that's what you did, because those are very round numbers and depreciation doesn't usually come out that neatly. If you did use the simplified method, put $0 in the TTax question about depreciation.

If you didn't use the simplified method, then you should also have form 8829 included in each return and the actual depreciation is shown on line 42.

 

[flyingaway]

The first time that I decided to prepare my tax return in February. Bought the software, but could not e-file, because I own IRS $243 and I need to pay $1 penalty, and their tax penalty form is not ready yet.

 

[aja8888]

Did these numbers come from line 30 of the Schedule C you filed in each of those years? To the left of line 30, there are two blanks for square footage of the home and square footage used for business. If those are filled in, then you used the simplified method. I'm thinking that's what you did, because those are very round numbers and depreciation doesn't usually come out that neatly. If you did use the simplified method, put $0 in the TTax question about depreciation.

If you didn't use the simplified method, then you should also have form 8829 included in each return and the actual depreciation is shown on line 42.

Yes, the square footage of the office was what was used to make the calculations. No matter what I do in TT, the exemption stays at $250,000, Even answering the questions on spouse passing less than two years ago.

Well, than I will go in and put $0 in those two depreciation blocks.

 

[mageedge]

An additional item to note is that the capital gain on the sale will be less than $168,000 because of the step up adjustment after spouses death (assuming joint ownership).
I see you live in Texas - in that state you will get a 50% value step up. (it is 100% is some community property states).
What that means is that the house original value of $209,000 is divided equally between spouses. On the death of one spouse their half of the house is "stepped up" to half of the current market value.
So, assuming $377,000 represented the fair market value upon her death, then the house base value becomes $104,500 (your half) + $188,500 (her half) for a total of $293,000 and a capital gain on sale of $84,000.
While this is not an issue for you with no taxable capital gains anyway, it may be important to other members of the forum dealing with the sad loss of a spouse.
I believe, particularly as we age, it is important to prepare a "spouse death" file, listing, in advance, all the necessary bits of bureaucracy you will need to deal with at that emotional time - in this case valuing assets for step up purposes.

 

[aja8888]

I changed the depreciation to $0 and a string of questions appeared asking about my wife's death date. Once answered, the exemption jumped to $500,000. Also TT said I do not have to report this house sale, which I won't.

 

[aja8888]

An additional item to note is that the capital gain on the sale will be less than $168,000 because of the step up adjustment after spouses death (assuming joint ownership).
I see you live in Texas - in that state you will get a 50% value step up. (it is 100% is some community property states).
What that means is that the house original value of $209,000 is divided equally between spouses. On the death of one spouse their half of the house is "stepped up" to half of the current market value.
So, assuming $377,000 represented the fair market value upon her death, then the house base value becomes $104,500 (your half) + $188,500 (her half) for a total of $293,000 and a capital gain on sale of $84,000.
While this is not an issue for you with no taxable capital gains anyway, it may be important to other members of the forum dealing with the sad loss of a spouse.
I believe, particularly as we age, it is important to prepare a "spouse death" file, listing, in advance, all the necessary bits of bureaucracy you will need to deal with at that emotional time - in this case valuing assets for step up purposes.

Thanks!

Thanks all for the help here!!!

 

[Wile E. Coyote]

I changed the depreciation to $0 and a string of questions appeared asking about my wife's death date. Once answered, the exemption jumped to $500,000. Also TT said I do not have to report this house sale, which I won't.

I would just report it. It has zero effect on your taxes. But, it would be easier just to show your work that you reported it and there was no tax effect rather than having to deal with it in a couple years in an audit. There's not a huge risk of audit; but, always higher when you have a big loss or have an unreported transaction.

 

[aja8888]

I would just report it. It has zero effect on your taxes. But, it would be easier just to show your work that you reported it and there was no tax effect rather than having to deal with it in a couple years in an audit. There's not a huge risk of audit; but, always higher when you have a big loss or have an unreported transaction.

Yeah, that's a good point as I have nothing to lose here.

Compared to the K-1 I am waiting on from the pipeline company I have shares in, the house reporting is a non event in comparison.

 

[38Chevy454]

Another point that maybe I missed, is the $3420 your total home office deduction? Because that total also includes utilities and other office related expenses. Depreciation is just a portion of the total home office deduction. But it seems you have it figured out and is not an issue to be reported or concerned with.

FWIW, I also do the home office deduction for my small home based business, but I do not take any depreciation deduction. Just to avoid all the hassles of trying to add it all up and potentially complicate future tax return if house is sold. My home office deduction is completely that year's expenses related to the business: percentage of utilities, business office expenses and equipment.

 

[aja8888]

Another point that maybe I missed, is the $3420 your total home office deduction? Because that total also includes utilities and other office related expenses. Depreciation is just a portion of the total home office deduction. But it seems you have it figured out and is not an issue to be reported or concerned with.

FWIW, I also do the home office deduction for my small home based business, but I do not take any depreciation deduction. Just to avoid all the hassles of trying to add it all up and potentially complicate future tax return if house is sold. My home office deduction is completely that year's expenses related to the business: percentage of utilities, business office expenses and equipment.

The $3,420 is for just the calculation of the office area based on sq. ft. Other business expenses were itemized based on cost.Those include phone, advertising, car miles, legal fees, supplies, etc. These are all on Schedule C.

 

[cathy63]

Another point that maybe I missed, is the $3420 your total home office deduction? Because that total also includes utilities and other office related expenses. Depreciation is just a portion of the total home office deduction. But it seems you have it figured out and is not an issue to be reported or concerned with.

FWIW, I also do the home office deduction for my small home based business, but I do not take any depreciation deduction. Just to avoid all the hassles of trying to add it all up and potentially complicate future tax return if house is sold. My home office deduction is completely that year's expenses related to the business: percentage of utilities, business office expenses and equipment.

Have you consulted a tax adviser on this? I think if you take a pro-rated portion of household expenses such as utilities then you have to use form 8829, and once you are using that form, you can't ignore depreciation. Even if you don't take the deduction, you still have to recapture it when you sell. If you use the simplified method instead, then you don't have depreciation to recapture.

On Sched C line 25, you can include utilities that are not connected to the house, such as a mobile phone, but you can't include things like a portion of your electric or water bills.