I have a home that has a basis of about $415K (due to many recent improvements that were made) and am having trouble selling it. If I convert it to a rental for one year and take about $10K in depreciation (using straight line) and then sell it next year, I think it well still sell AT A LOSS since I think it will be a long time before I can get $405K plus realtor's commissions for the house. Two questions:
1. Since I expect to sell at a loss, will the depreciation that I took still have to be recaptured (i.e will it be 1250 depreciation)?===============>>No;there is no gain to be treated, I mena to be recaptured, as sec 1250 unrecaptured depreciation taxed at 25%(aslongas your tax rateis 25% or higher), so you do not recapture the unrecap depre taken previously.
2. Since it will be a rental when I finally sell, can I treat it as an investment rather than a primary residence sale so that the loss can be deducted?==========>Correct instead of converting it to your primary residence, you may sell it as an investment(trade/biz use pty), then you can deduct your losses; The IRS allows a tax deduction for capital losses on rental property.Typically, you can only claim a deduction for the sale of a rental property if you sustain a capital loss from the sale. However, you may qualify for tax breaks for expenses paid during the tax year prior to the sale, or for operating losses. If your rental property sale leads to a capital loss, the IRS limits the amount you can deduct but allows you to carry over losses to subsequent tax years.Since you lose money on the sale of your rental property you may qualify for a long term capital loss deduction. As of the 2014 tax year, the IRS allows you to take a tax deduction of up to $3K for capital losses as MFJ, or $1.5K if you file return as MFS/single. If your losses exceed the limit, you can claim the additional amount in subsequent tax years until the loss is used up.however, you may be eligible for tax deductions for rental expenses paid during the tax year before you sold your rental property. For instance, you can typically deduct repair costs for rental properties, including expenses paid to prepare the property for sale. You can also deduct the cost of insurance for the property, including landlord liability coverage and flood insurance. If you hired professionals to help sell your property, such as an attorney / real estate agent, you can also deduct their fees.
I realize that most depreciation recapture questions deal with selling their homes at a gain, but I am concerned about the tax consequences of selling the home at a loss.====>Correct; as mentioned above, for example, if you lost $100k on your rental property, you could sell stock that had appreciated by $100k and not pay any taxes on that stock sale. If you have more loss from the sale of your real estate property than you have gains to realize, you can also write off up to $3k of your capital loss against your income. Any loss that you don't use gets carried forward to the future until you either use it to offset other gains or use it up by claiming your $3k loss.