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Old 08-25-2015, 01:21 PM
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sale of residence converted to rental

I am a US Public Health Service member on extended active duty. My husband and I bought a home in California on April 12, 2005 and lived there until October 2009 when we moved to Georgia on USPHS orders. We converted the house to a rental on Feb 10, 2010 as a temporary measure , hoping to move back into it as our main home later. Purchase price was $510,000. Fair market value that we used for depreciation when converted was $304,000. We took $15,652 depreciation while it was rented. The renters moved out in 2012, and the house was sold by the bank July 16, 2013 for $365,000 on a short sale because we could not make the payments with the renters gone. We did not report the sale on our 2013 return because we thought it qualified as our main home, and we had a loss anyway. Now we have a letter from California taxing us on the $365,000.
I have read in Publication 3 that service members can suspend the 5 year ownership/use period while on extended active duty, and that some of the tax benefits received by members of the armed services can be received by members of USPHS. Is suspension of the 5 year period available to me? If not, how do I handle the sale? What do I use as my basis in the house? I also got a form 1099c for $108,977 on the short sale. How do I handle this? Does this qualify for personal residence debt forgiveness?



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Old 08-25-2015, 11:02 PM
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I am a US Public Health Service member on extended active duty. My husband and I bought a home in California on April 12, 2005 and lived there until October 2009 when we moved to Georgia on USPHS orders. We converted the house to a rental on Feb 10, 2010 as a temporary measure , hoping to move back into it as our main home later. Purchase price was $510,000. Fair market value that we used for depreciation when converted was $304,000. =====>> The basis of a rental property is the value of the property used to calculate your depreciation deduction on your federal income taxes. The IRS defines the tax basis of a rental property as the LOWER of FMV on the date of conversion or the adjusted basis of the property minus the value of the land. You can calculate the tax basis of a rental property by calculating the FMV of the property and then comparing it to the adjusted basis of the property.

We took $15,652 depreciation while it was rented. The renters moved out in 2012, and the house was sold by the bank July 16, 2013 for $365,000 on a short sale because we could not make the payments with the renters gone. We did not report the sale on our 2013 return because we thought it qualified as our main home, and we had a loss anyway. Now we have a letter from California taxing us on the $365,000.
I have read in Publication 3 that service members can suspend the 5 year ownership/use period while on extended active duty, and that some of the tax benefits received by members of the armed services can be received by members of USPHS. Is suspension of the 5 year period available to me?=============>>The ownership/use is just for the purpose of the principal home sale gain exclusion; on sale of your principal home, to qualify for the $250K/$500K home sale long term capital gain exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Aslongas you are a member of Uniformed Services, Foreign Service, or an employee of the intelligence community in the US, you may choose to suspend the 5-year test I guess 10 year for military service members, period for ownership and use if you are on qualified official extended duty. So, you can meet the 2-year residence test even if, due to your service, you did not actually live in your principal home for at least two years during the five-year period ending on the date of sale.

If not, how do I handle the sale? What do I use as my basis in the house?======>>As mentioned above. Please read the first comment above for depreciable basis.


I also got a form 1099c for $108,977 on the short sale. How do I handle this? ========>> You got a Form 1099-C because your lender decided it can not recover what you owe on your mortgage loan and is therefore canceling or forgiving a portion of your debt.The part of your mortgage debt that is canceled is generally the difference between what you owed on your mortgage and the home’s FMV on the open market. Since your forgiven debt is subject to taxation, then, you will usually receive a form 1099-C; You need to file the 1099-C with your 1040, and the amount of canceled debt is added to your gross income on 1040 UNLESS your debt was canceled in a Title 11 bankruptcy or during insolvency; Principal residence indebtedness (Applying only to your principal residence) under terms of the Mortgage Debt Relief Act. Aslongas you claim an exclusion, you can’t claim tax credits or capital losses or otherwise improve your tax situation using the excluded property.

Does this qualify for personal residence debt forgiveness?========>>Yes.As you said, aslongas it was your principal residence, then, yes; Mortgage Debt Relief and provision applies to debt forgiven in calendar years 2007 through 2014. Up to $2 M of forgiven debt is eligible for this exclusion ( actually, Debt Cancellation was extended up to Dec 31 2014); Homeowners who sell their primary residence in a short sale or lose their home to foreclosure will not have the added insult to injury of losing their home and then having to pay taxes on the loss up to $2 million. Prior to 2007, many financially strapped taxpayers with forgiven mortgage debt were required to pay federal taxes on it, because the IRS treated it as taxable income.However, thanks to the Mortgage Forgiveness Act of 2007, most borrowers whose mortgage debt on their primary residence is cancelled between Jan. 1, 2007 and the end of 2014 will not have to pay federal taxes on it;

For CA , the CA exclusion is extended to apply to discharges occurring on or after Jan 1, 2013, and before Jan 1, 2014; Qualified principal residence indebtedness is limited to $800K;CA residnets may exclude from gross income up to $500K of mortgage debt forgiven. I guess for more info on your CA return you need to contact CA BOE.



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