I truly cannot thank you two enough for your advice on how to resolve this issue. Others, including tax experts I've consulted on-line and via friends, were vexed on how to report this situation. You've both been terrific and so responsive!
Based on your instructions, I've decided to take somewhat of a hybrid approach. I played around with various scenarios in TT. Here's what I'm planning to do:
1. Declare the sale of the home on Form 4797 -- Sales of Business Property
2. Declare the released multi-year PAL carryover as regular income and as a negative entry in "Other Income," which I found to be easily entered in the TT "Other and Miscellaneous Income" menu in the Income/Wages tab. This entry shows up on Line 8 of 1040 Schedule 1 verbatim.
3. I note in the instructions for Form 8582 (used to carry over PAL year to year), in the year of dispositioning a previous passive activity, if all of the carryover can be used (which it can in 2020) there is no need to file 8582 again in that year, so big relief there. No need to figure out how to generate a 2020 8582 in TT!
Like everyone, I want to report this obscure situation in the most legitimate way so that it raises no red flags with the IRS. For that reason, I decided not to file a Schedule E because TT does not allow me to use the form at all unless I erroneously declare 14 days rented at fair market value, which -- regardless of whether I declare 0 rental income and 0 expenses -- is untrue. I don't want to declare anything that is untrue even if the math is right. I'm also opting not to file the "Sale of Main Home" form and instead use 4797 because I think it appears more legitimate to dispose of this previous passive activity as an investment property now (it was for 10 of the 12 years I owned it) even if I lived in it for a time in 2020. Because my spouse and I do not qualify for the $500K exemption on capital gains and because both the Sale of Main Home form and the 4797 take into account reclaimed depreciation, the amount of capital gains both forms generate is exactly the same figure. I just think 4797 feels more legitimate and pairs well with the PAL I'm declaring on Schedule 1 when scrutinized. If the IRS looks back through my tax history, they're going to see a Schedule E declared in 2019 all the way back to 2010, when I first rented the property. 4797 feels like the most appropriate way to dispose of it.
Does my logic and decision making seem right to you two (creative) experts? Anything I'm missing here? Again: I can't thank you enough!
Mike (golies)
