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Old 01-02-2011, 12:48 PM
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Property Rental conversion to Primary Residence and Back to Rental Property

I have a rental property that has about a $60K loss carry over. I plan to use the property as my primary residence for about 2 years when I live in the area and then convert it back to a rental property once I leave the area. How do I handle the $60K loss carry over as a rental property? Can I apply this $60K loss carry over again once the property is placed back into service as a rental property 2 years from now?

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Old 01-03-2011, 08:47 AM
Join Date: Oct 2010
Posts: 5,257
“. How do I handle the $60K loss carry over as a rental property?”----> Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition, i.e., In a fully taxable event (where all gain/loss is realized and recognized). However, Conversion to personal use is not fully taxable event. The conversion of MACRS property, your rental property, from your rental business or income-producing use to personal use during a taxable year is treated as a disposition of the property in that taxable year. However, upon the conversion to personal use, no gain, loss, or depreciation recapture under section 1245 or section 1250 is recognized. However, the provisions of section 1245 or section 1250 apply to any disposition of the converted property by the taxpayer at a later date. So, those losses remain suspended until you have a taxable disposal (like kind exchanges do not free up passive losses, for example). I guess, but I think the subsequent sale of the residence after it had been converted to personal would allow you to take the unallowed losses. As a real estate owner, you’re probably aware of the dreaded passive loss rules. If they applied to you in previous years, some or all of your rental real estate losses may have been deferred (suspended) for tax purposes. You generally cannot deduct those suspended losses until you either have positive taxable income from your rental real estate activities or until you sell the property (or properties) that generated the losses in the first place.
Please visit the IRS Website here; Passive Activity Loss ATG - Chapter 5, Dispositions
However, you should record the income and expenses for the rental property for the period of time during the year that the home was a rental property on Schedule E and also record the applicable itemized deductions of real estate taxes and any mortgage interest for the period the home was a primary residence as itemized deductions( if you claim’em) on Schedule A(If it's rental property, you CAN'T claim the interest/taxes on schedule A. Use Schedule E like you are supposed to; however, if the property is considered to be residence, then you can itemize real estate taxes and mortgage interest expenses on Sch A) . When you sell a passive rental property, you can use the suspended passive losses from earlier years to offset the gain generated by the sale. Your new basis in the home is the original purchase price less any accumulated depreciation during the rental period.

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