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Old 04-02-2014, 05:20 PM
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Basis on selling a converted-rental property

I originally bought a condo for $200,000. When I recently converted it to a rental, the fmv was $100,000 and I plan to use $100,000 as the depreciation basis. If I sell the property a few years from now for $150,000, what is my basis for figuring out if I have a capital loss or gain? Thanks very much in advance for your response!



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Old 04-02-2014, 05:59 PM
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Quote:
Originally Posted by jmleinenbach View Post

#1;I originally bought a condo for $200,000. When I recently converted it to a rental, the fmv was $100,000 and I plan to use $100,000 as the depreciation basis.


#2;If I sell the property a few years from now for $150,000, what is my basis for figuring out if I have a capital loss or gain? Thanks very much in advance for your response!
#1;It depends;it is either the lower of FMV or adj basis when it was converted to rental pty. as the property was converted from personal use to a rental property, fmv(assume FMV is $200K) is the value of the property on the date of conversion.also you need to determine the adjusted basis of the rental property. The adjusted basis is the cost of the building plus any permanent improvements or other capital costs minus the value of the land. Assume the rental property was purchased for $150K and had a land value of $25K. Since purchasing the property, you have invested $30Kinto capital improvements. $150K + $30K - $25K = $155K. The lower of the two amounts is your tax basis for the rental property. Continuing the same example, since $155K is less than $200K , your tax basis for the property is $155K.

So, to determine the basis you need several pieces of data: 1. Your original basis in the property. 2. The dollar amount of any improvements made while you occupied it as your residence. 3. The fair market value of the property when you converted it to rental use. 4. The value of the land both when you bought the property and when you converted it to rental use. For items 1 and 2 your records will suffice. Items 3 and 4 should be backed up with professional appraisals by a licensed real estate appraiser to avoid any hassles with the IRS down the road. The IRS may not question your depreciation deductions year in and year out but they can still challenge what should have been *allowable* depreciation years down the road when you sell. Your basis for depreciation once you convert it is the lower of the adjusted basis items 1 and 2 or the fair market value when you converted it to rental use. You then deduct the lesser land value (at purchase time or conversion time) from this figure to get the basis for depreciating it as a rental since you cannot depreciate land.



#2;the basis that you chose when you converted it to rental pty. However, you do not need to recapture sec 1250 ,also called unrecaptured r/e depre,depreciation aslongas you take losses on the sale of the home.whethter or not you take loss on the saleof your pty used as rental pty, you need to file form 4797.however, as you take loss you do not need to fill in PART #3 on 4797. if the property was your principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the last 3 years before the date of the sale, you held the property as a rental property. You can still exclude the gain on the sale aslongas you sell it at a gain.

NOTE: You must depreciate rental property since the depreciation is subject to recapture at sale time even if you don't take it while you hold the property for rental.



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Old 04-03-2014, 10:16 AM
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Can I get more specifics?

It's disappointing that my question is being addressed with a generic response that always worked in a rising housing market. However my situation is different than this one, and probably not all that uncommon today. I originally paid roughly $200,000 for my condo, and the value when I converted it to a rental (mid-last year) was $100,000. In this response, the numbers were switched, but this is a situation where I have lost a lot of money. I'm hoping to close the gap between market value and mortgage balance in a few years. If I do, I'll be selling the unit for $125,000, let's say. Forget about improvements. In this case, do I have to pay taxes on a sale, even though I have a loss based on the original purchase price?



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Old 04-03-2014, 07:26 PM
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Quote:
Originally Posted by jmleinenbach View Post
. I originally paid roughly $200,000 for my condo, and the value when I converted it to a rental (mid-last year) was $100,000. In this response, the numbers were switched, but this is a situation where I have lost a lot of money. I'm hoping to close the gap between market value and mortgage balance in a few years. If I do, I'll be selling the unit for $125,000, let's say. Forget about improvements. In this case, do I have to pay taxes on a sale, even though I have a loss based on the original purchase price?
it depends; When you sell it as your primary residence, not as rental pty,then, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes. To qualify, you need to own and live in the property has his or her primary residence for at least two years out of the five years ending on the date of sale.however, as mentioned previously as you took depreciation while you used it as rental , you must recapture the unrecatured depre when you sell it so you need to pay tax on all or part of your gain of $25K;$$125K-$100K. for example, if your unrecaptured deprciaition is $25K, then you must pay tax on the whole $25K gain. The tax rate’d be 25% if your marginal tax rate is 25% or higher



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Old 04-04-2014, 11:27 PM
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breakdown

Loss on personal property is not deductible

but..

Since you used your condo as a rental property, now your basis is the fmv or your cost basis plus improvements less depreciation, whichever is less at the time of conversion.

gain on sale = more taxes (capital gain) unless you qualify for section 121 exclusion, then only your deprecation is taxable plus any amount over $250,000 or $500,000 for MFJ.

loss on rental property is deductible (did you use it for more than 1 year as rental property? then see section 1231 losses.)

(Although your situation may seem quite simple, there are also many other factors such as depreciation or certain credits you may have taken/ or can take. Consult a tax professional that is knowledgeable in this area. It may be well worth your time and money.)


Last edited by eugea : 04-04-2014 at 11:40 PM.


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