How to properly report sale of rental house on tax return - former rental property sold after vacancy

You'll need to use Form 4797 (Sale of Business Property) to report the sale since this was a rental property. Even though it wasn't actively rented in 2023, it's still considered business/investment property because of its previous use as a rental. Since you owned it for more than a year, the gain would typically be treated as Section 1231 gain, which often receives capital gains treatment. You'll need to account for depreciation recapture using Form 4797 Part III (for the depreciation you claimed while it was a rental). You should not need to file Schedule E for 2023 if there was no rental income or expenses related to rental activity. The renovation expenses prior to sale would typically be added to your cost basis rather than deducted as rental expenses. If you're using FreeTaxUSA, look for the section dealing with "Sale of Business Property" or specifically Form 4797 rather than the regular income section that's used for personal residences.

After spending hours trying to figure out this exact situation last year, I found taxr.ai really helpful. I had a similar property that I renovated before selling and wasn't sure how to handle the renovations or where to report everything. I uploaded my documents to https://taxr.ai and got immediate clarification on how to properly categorize everything. They confirmed I needed Form 4797 and explained exactly how to handle the renovation expenses as additions to my cost basis. Their analysis even pointed out some deductions I had missed in previous years that I was able to correct with an amended return. The system analyzed my previous Schedule E forms and my closing documents to give me a complete picture of my adjusted basis including depreciation recapture. Saved me a ton of stress.

Just wanted to follow up that I decided to try taxr.ai after my skeptical question above. The service was actually really helpful for my rental property sale. I was completely confused about depreciation recapture and how to handle improvements I'd made over the years. It clarified exactly what forms I needed and how to properly document the 25% depreciation recapture tax vs the 15% long-term capital gains portions. Honestly saved me from making a costly mistake. The document scanning feature was able to extract information from my old Schedule E forms that I had forgotten about. Definitely worth it and the security concerns I had were addressed in their FAQ.

Another option that helped me tremendously with a similar situation was calling the IRS directly through Claimyr. I had a complicated rental property sale with partial-year usage and couldn't figure out if my $32,000 in renovation expenses should go on Schedule E or add to my basis. I was putting off calling the IRS because I didn't want to wait on hold for hours, but using https://claimyr.com got me connected to an IRS agent in about 15 minutes. You can even see a demo of how it works here: https://youtu.be/_kiP6q8DX5c The agent was surprisingly helpful and walked me through exactly how to handle everything in my tax software. They confirmed I needed to use Form 4797 and explained the difference between repairs (Schedule E) and improvements (added to basis) for my situation.

I need to eat my words about being skeptical of Claimyr! After posting my doubtful comment, I decided to try it since I've been struggling with this same rental property sale issue for weeks. I couldn't believe it - I was connected to an IRS tax specialist in about 20 minutes without having to sit through the hold music or automated messages. The agent confirmed exactly how to handle my rental property that I renovated before selling. They walked me through Form 4797 and explained precisely how to calculate my adjusted basis including the improvements. I've literally been trying to reach the IRS for THREE WEEKS with no success until I tried this. The time saved was absolutely worth it, and I'm confident my return is correct now.

One important thing to consider that nobody has mentioned yet - if this was previously your primary residence before becoming a rental, you might be eligible for a partial exclusion of gain under Section 121. If you lived in the house for at least 2 years during the 5-year period ending on the date of sale, you could exclude up to $250,000 of gain ($500,000 if married filing jointly). The exclusion would apply to the portion attributable to your use as a primary residence. The remaining gain (from the rental period) would still be reported on Form 4797.

Has anyone used TurboTax for reporting a rental property sale? I'm in the same situation but having trouble finding where to enter the renovation costs that should be added to basis.

I went through this exact same situation last year with a rental property I sold after renovating it. One thing that really helped me was keeping detailed records of all renovation expenses with receipts and invoices. The IRS wants to see clear documentation that these were capital improvements rather than routine repairs. For the $28,000 in renovation costs you mentioned, make sure you categorize them correctly. Things like new flooring, kitchen remodels, bathroom updates, and structural improvements definitely add to your basis. But routine maintenance like painting touch-ups or fixing broken fixtures typically don't qualify as capital improvements. Also, don't forget about depreciation recapture! Since you depreciated the property from 2016-2022, you'll need to "recapture" that depreciation at a 25% tax rate on Form 4797. The remaining gain gets taxed at capital gains rates. It's more complex than a regular stock sale, but Form 4797 walks you through it step by step. If you're still unsure about any of the details, consider having a tax professional review your return before filing. Rental property sales can have expensive mistakes if not handled correctly.