Originally Posted by Bbruley
I retired along with my wife and now have pensions, SS, and investment earnings for living. We moved into our rental property two years ago and consider it our primary residence. We have $250k in accumulated losses and depreciation of $104k. I understand that I must sell the property to realize the accumulated losses. Not sure how that works and what is net effect on taxes by claiming the loss. Assume $200k annual earnings and effective tax rate of 20 percent. Purchased property for $320k, expect sale price of $400k.
retired along with my wife and now have pensions, SS, and investment earnings for living. We moved into our rental property two years ago and consider it our primary residence. We have $250k in accumulated losses and depreciation of $104k.==========>>>>Then aslongas your accumulated losses of $250K exceeds your accumulated depre of $104K, you do not need to recapture the unrecaptured depreciation, Sec 1250 depreciation recapture taxed as ordinary income at 25% UNLES your tax rate is lower than 25%.However, if you convert the rental pty as your primary residence( I am not sure if you’d do it), then, You want to deduct this loss when you sell your home. Losses on personal property including your residence are not tax deductible.However, theoretically you do not need to convert your home into a primary personal residence but keep it as a business investment so-to-speak, rent it out for a bit and then sell it claiming the loss as a business investment loss. Nice try, but you have an issue;when you sell the property you need to calculate the gain or loss. The difference between the sale price and the cost basis is the gain or loss. Your cost basis is the lower of fair market value (or assessed value) at the time of rental conversion(if you converted it as rental pty) or the original purchase price, adjusted for improvements, closing costs, etc.
I understand that I must sell the property to realize the accumulated losses. ========>Correct; unless you dispose of it, you can’t realize the accumulated depre of $104K.
Not sure how that works and what is net effect on taxes by claiming the loss.=====>>as mentioned above.
Assume $200k annual earnings and effective tax rate of 20 percent. Purchased property for $320k, expect sale price of $400k=====>>>>>>>>According to this info; your adjustd basis’d be purchasing price of $320K minus accumulated depreciation of $104K, so $216K(without consideration s of other factors,i.e., improvements or etc) so your gain’d be $184K;$400K minus $216K(your adj basis).You need to recapture sec 1250 depreciation of $104K(as $104K is smaller than your gain of $184K) so you need to pay tax on the recaptured depre of $104K at 20% and the remaining gain is LTCG sec 1231 gain taxed at 15% as your marginal tax rate is 20%.
A rental home owner can maximize his earnings from the sale of property by living in a rental property as his main residence( by converting the rental as primary residence) for two years before he sells. The IRS allows a taxpayer to exclude up to $250,000 if single and $500,000 if married in capital gains if he qualifies, and he can repeat the process as many times as desired for additional savings