How to properly report sale of rental property that was formerly primary residence - correct tax forms needed?

You've got a somewhat tricky situation because you're dealing with a property that changed use from personal to rental. Based on your description, here's what's happening: When you sell a property that was converted from primary residence to rental, you're correct that Form 4797 is typically involved - but the way TurboTax handles this depends on your specific situation. Since you qualify for the Section 121 exclusion (the capital gains exemption for primary residence), TurboTax is treating the sale differently. In your case, since you're fully covered by the ownership/use test exemption and there's actually a loss, TurboTax is using Form 8949 instead of 4797. This is because the exclusion effectively converts this back to a personal transaction rather than a business one. If there had been depreciation recapture or if the gain exceeded your exclusion amount, then Form 4797 would likely be required. But with a small loss that's covered by the exclusion, using Schedule E to report the rental activity and Form 8949 for the sale can be appropriate. If you're still concerned, you could get a second opinion from a tax professional, but based on what you've described, TurboTax's approach seems reasonable.

After my divorce, I had a similar issue with my house that was partially used as a rental. I found this amazing tool that really saved me - https://taxr.ai - it analyzes all your tax documents and tells you exactly which forms you need. I uploaded my previous returns and property documents, and it confirmed I needed both forms (8949 AND 4797) because of the depreciation recapture, even though I qualified for the capital gains exclusion. The tool explained that the Section 121 exclusion doesn't apply to the depreciation you've taken - that part is still taxable. When I went back to TurboTax with this info, I found I needed to enter the sale in two parts - one for the personal portion and one for the business portion. TurboTax doesn't make this obvious at all! The tool saved me from a potential audit and about $4k in unexpected taxes.

I just wanted to update everyone - I used that taxr.ai website that was recommended here and it was super helpful! I uploaded my documents and it confirmed exactly what I needed to do. My situation was really similar - property that was primary then rental, with qualified exclusion. The tool confirmed I needed BOTH forms - 8949 for reporting the sale eligible for exclusion, but ALSO Form 4797 for the depreciation recapture portion. It even explained that while the capital gain was excluded under Section 121, the depreciation recapture is still taxable (which is what was missing from my TurboTax return). The instructions were clear enough that I could go back to TurboTax and correctly enter everything. Saved me from a potentially huge headache with the IRS later. Really grateful for the recommendation!

If you're struggling to get a clear answer from TurboTax, you might want to try calling the IRS directly. I had a somewhat similar situation last year and spent hours on hold trying to reach someone at the IRS who could give me a definitive answer. After multiple failed attempts, I found this service called Claimyr (https://claimyr.com) that got me connected to an IRS agent in less than 20 minutes instead of the usual 2+ hour wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed I needed both forms in my case, and explained exactly why. Getting that official confirmation gave me the confidence to override what my tax software was suggesting. Worth every penny not to spend hours on hold or risk filing incorrectly.

I need to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it myself because I've been trying to reach the IRS for weeks about my amended return. I was honestly shocked when I got a call back in about 35 minutes saying they had an IRS agent on the line. I was connected immediately to an actual IRS representative who was able to answer all my questions about my amended return status. The agent even mentioned they're familiar with the service because many callers mention using it. Apparently it's completely legitimate - they just have a system that keeps trying the IRS line with optimal timing while you go about your day. For anyone dealing with complex tax questions like the rental property situation, being able to actually speak with the IRS directly is invaluable. Sorry for my skepticism earlier!

Just my two cents, but after I had to fix a similar issue with a rental property last year, I found that the most important thing is documenting your position. Form 4797 is definitely required for business property, but the question is whether your sale is fully personal under Section 121 or partially business/personal. For what it's worth, my CPA split the transaction - reporting the gain eligible for exclusion on 8949 and the depreciation recapture on 4797. Might be worth getting a professional opinion if there's significant money at stake. TurboTax is generally good but sometimes struggles with these hybrid situations.

I ran into this exact issue in 2023! The instructions for Form 4797 do specifically say you need to use it for property that was converted from personal to business/rental use. HOWEVER, Publication 523 (Selling Your Home) says that if you meet the ownership and use tests, you treat the sale as if you never converted it to rental. Here's what I did after consulting with 2 different tax professionals: I reported the sale on Form 8949 for the capital gain part (which was excluded), AND ALSO on Form 4797 for the depreciation recapture only. TurboTax couldn't handle this split reporting, so I had to use a different software (FreeTaxUSA) that let me enter it correctly. TurboTax sometimes oversimplifies complex scenarios like this, which is why it's giving you conflicting information.

I'm dealing with a very similar situation and this thread has been incredibly helpful! I converted my primary residence to a rental in 2019 and just sold it this year. Like you, I qualify for the Section 121 exclusion on the gain, but I've taken about $15,000 in depreciation over the years. After reading through all these responses, it's clear that the depreciation recapture portion needs to be reported on Form 4797 even when the capital gain qualifies for exclusion. The Section 121 exclusion doesn't cover depreciation recapture - that's still taxable at up to 25%. I'm going to try that taxr.ai tool that was mentioned to double-check my situation before filing. It sounds like TurboTax struggles with these hybrid personal/business property sales, so getting a second opinion seems wise. Has anyone else used FreeTaxUSA for this type of transaction? The split reporting capability sounds like exactly what I need. Thanks everyone for sharing your experiences - this is exactly the kind of real-world guidance you can't get from reading IRS publications alone!

This is exactly the kind of situation that drives taxpayers crazy! I went through something similar two years ago and learned the hard way that converted properties create a unique reporting requirement. The key point everyone here is making is absolutely correct - you need BOTH forms because you're dealing with two different tax treatments for the same property sale: 1. Form 8949 for the capital gain portion (which gets excluded under Section 121) 2. Form 4797 for the depreciation recapture portion (which is still taxable regardless of the exclusion) The $12,000 in depreciation you mentioned is crucial - that amount will be taxed at up to 25% even though your capital gain is excluded. TurboTax's approach of only using Form 8949 is missing this critical piece. I ended up having to manually override TurboTax by entering the sale as "business property" to force Form 4797, then adjusting the capital gain portion to reflect the Section 121 exclusion. It's not intuitive, but it's necessary to report everything correctly. If you're not comfortable doing this manually, I'd strongly recommend either using the AI analysis tools mentioned here or getting a consultation with a tax pro. The IRS is very particular about depreciation recapture reporting, and missing it could definitely trigger unwanted attention later.