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Old 02-06-2009, 04:30 PM
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Second Home was used as Rental Property

We have a second home sold in 2008 which was used as rental property for 2000-2004. How do we report the sale? As a second home or as business property? How do we account for the $12,000 passive activity losses carried over? Thanks



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Old 02-06-2009, 10:06 PM
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Well, it seems that you have converted the home from a rental property to a 2nd personal residence. Therefore, you probably know that you can deduct your mortgage interest and property taxes incurred on the 2nd home along with the mortgage interest and property taxes from the first home. But, the second home, not used for business, would be treated as a capital asset to you.

If that rental property now a 2nd residence is held for more than one year and is sold at a gain, such gain will be taxed as long-term capital gain subject to a maximum federal tax rate of 15%. Further, a capital gain may be offset on a dollar-for-dollar basis by deductible capital losses.

If you incurred a capital loss on the sale of the 2nd home, you may be out of luck as the current tax loss does not permit the deduction of loss on sale of 2nd residence as it is considered a non-deductible personal loss.

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