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Old 06-11-2014, 05:45 PM
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capital gains what is the basis?

My husband at the time and i built a home and our initial loan was for $130,000 in 1998...we moved in and took the next 12 years to finish the house, paying out of pocket.
We divorced in 2009 and now the loan would be $264k after a refinance.
I having been renting this house for three years this month (June) Prior to that I lived in it.
I would like to sell it...I really cant get more than $290,000 out of it...I just need to know if I will be paying capital gains? My basis on depreciation when I started renting was $255k...so will I owe capital gains if say I sold it in October of this year? I know there is some sort of basis...is it based on the $130k? or the $255k? I want to make sure I get enough out of it to cover any taxes etc...don't want to end up owing anything extra...this is the way short version on this story...thank you for any help. T



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Old 06-11-2014, 06:32 PM
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Join Date: Mar 2014
Location: Huntington Beach, CA
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Taken from IRS Publication 527

Taken Directly From Pub 527


IRS

Basis of Property Changed to Rental Use


When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion.

Fair market value. This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Figuring the basis. The basis for depreciation is the lesser of:

•The fair market value of the property on the date you changed it to rental use, or


•Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. For other increases and decreases to basis, see Adjusted Basis in chapter 2.




Example.

Several years ago you built your home for $140,000 on a lot that cost you $14,000. Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation.

The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500).

On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house.

The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000).

Finally, it is important to remember that you contact a qualified tax professional in your area. This post intentionally ignores all State and Local tax issues intentionally. Which is why you should seek competent advise.

Best regards,

Ron Fenney
Tax Accountant
Welcome | Only Tax Appeals



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Old 06-12-2014, 10:07 PM
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Posts: 5,233
Quote:
Originally Posted by 28tprest View Post
My husband at the time and i built a home and our initial loan was for $130,000 in 1998...we moved in and took the next 12 years to finish the house, paying out of pocket.
We divorced in 2009 and now the loan would be $264k after a refinance.
I having been renting this house for three years this month (June) Prior to that I lived in it.
I would like to sell it...I really cant get more than $290,000 out of it...I just need to know if I will be paying capital gains? My basis on depreciation when I started renting was $255k...so will I owe capital gains if say I sold it in October of this year? I know there is some sort of basis...is it based on the $130k? or the $255k? I want to make sure I get enough out of it to cover any taxes etc...don't want to end up owing anything extra...this is the way short version on this story...thank you for any help. T
I would like to sell it...I really cant get more than $290,000 out of it...I just need to know if I will be paying capital gains?================>>>>>>>>>>>I guess it is your primary home, then, as you can see, if you sold the home and made a profit, you may be able to exclude that profit from your taxable income; you can exclude up to $250K in profit from the sale of a main home as long as you have owned the home and lived in the home for a minimum of two years. In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. Just like calculating capital gains, the formula for calculating the gain or loss involves subtracting your adjusted cost basis from your selling price.
for calculating your cost basis on your main home , you need to report your; Purchase price + Purchase costs (title & escrow fees, real estate agent commissions, etc.)+ Improvements (replacing the roof, new furnace, etc.) + Selling costs (title & escrow fees, real estate agent commissions, etc.)- Accumulated depreciation (for example, if you ever took the office in the home deduction)= Adjusted Cost Basis. And then calculating your profit or loss ; Selling price- adjusted Cost Basis= Gain or Loss . If the resulting number is positive, you made a profit when you sold your home. If the resulting number is negative, you incurred a loss. Finally, you need to calculate your taxable gain:Gain- Maximum or Partial Exclusion($250K)= Taxable Gain. Aslongas you have any taxable gain, then you must recapture your accumulated depreciation taken previously when you rented it as rental home as sec 1250 depreciation recapture(real setae depre recapture) taxed as ordinary income at 25% aslongas your marginal tax rate is 25% or higher. So your exclusion amount’d be reduced by the amount of depre recapture.


My basis on depreciation when I started renting was $255k...so will I owe capital gains if say I sold it in October of this year?============>>>>>>>>>As mentioned above, it is the defference between your Selling price and Adj cost Basis of the home.



I know there is some sort of basis...is it based on the $130k? or the $255k?=============>>>>>>>>>>>> Refinancing has nothing to do with the basis of property. Generally the basis will be the original cost of the property plus the cost of any improvements you made while you owned the property. There are a few other things that could effect the basis but that would be a good start a s said, as yo can see, your tax basis in your home will be a key factor in calculating your tax gain or loss when you sell your home.It is neither $130K nor $255K; adjusted cost basis is; your Purchase price+ Purchase costs (title & escrow fees, real estate agent commissions, etc.)+ Improvements (replacing the roof, new furnace, etc.)+ Selling costs (title & escrow fees, real estate agent commissions, etc.)- Accumulated depreciation (for example, as you took depre in the previous years while you used it as rental home)= Adj. Cost Basis. So, if you’ve purchased your home, your starting point for determining the property’s basis is what you paid for it. Logically enough, this is called its cost basis. Your cost basis is the purchase price, plus certain other expenses. You use the full purchase price as your starting point, regardless of how you pay for the property with cash or a loan. If you buy property and take over an existing mortgage, you use the amount you pay for the property, plus the amount that still must be paid on the mortgage.For example, you buy your home for $60K cash and assumes a mortgage of $240K on it. The starting point for determining your basis is $300K.ALSO, remember,certain fees and other expenses you pay when you buy a home are added to your basis in the property. Most of these costs should be listed on the closing statement you receive after escrow on your property closes. However, some may not be listed there, so be sure to check your records to see if you’ve made any other payments that should be added to your property’s basis. These include real estate taxes owed by the seller that you pay, settlement fees and other costs such as title insurance.

NOTE; When the property is converted to rental home, the basis for depreciation is the LOWER of the adjusted basis on the date of conversion or the Fair Market Value of the property at the time of conversion. Generally the basis is the cost of the property plus the amounts paid for capital improvements, less any depreciation and casualty losses claimed for the tax purposes. The property must be depreciated using the method and recovery period in effect in the year of conversion,27.5 years.When the property is sold the basis is calculated differently for gain or loss. When the property is sold at a gain the basis is the original cost plus amounts paid for capital improvements, less any depreciation taken. When sold at a loss the starting point for the basis is the lower of property original cost or the FMV at the time it was converted from personal to rental property. If the property is rented for three years or less then sold, you still may be eligible for the 250K gain exclusion. For example,You convert your personal residence to rental property five years ago. The house originally cost $ 200K. Its FMV was $135K, when it was converted to a rental. Over the 5 years $10K in depreciation was taken. you sold the property for 105K. This results in a tax loss because the selling price, $105K, is significantly lower than the FMV , $125K, on the conversion date. If you sold it for 220K, then your gain’d be $30K($220K-$190K) and you need to recapture $10K of $30K as ordinary income taxed at 25% if your marginal tax rate is 25% or higher.
Original Cost $200K ; FMV on Conversion date $135K ; Depreciation Taken $10K
Basis for tax loss $125K; Basis for tax gain ($200K-$10K) $190K
Net Sales Price $105K ; Tax Loss ($135K>$105K) $20K
Tax gain N/A



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