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Old 03-02-2011, 01:13 PM
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Rental not for profit?

My wife and I bought a townhome in 2003 which we lived in as our primary residence until 12/01/2009. On 01/01/2010 we converted it to a rental because we could not sell it. We will be keeping the property for many years to come and hopefully it will eventually turn a profit. I have 2 questions related to filing our 2010 taxes and this rental property.

First, we expect losses from this property until we can refinance or pay down the mortgage, which given the housing market is several years away (maybe 5 or more). We do own 100% of the property and we do actively participate in the rental activities. Ideally I would report the passive income and use the loss to offset our wage income within the income limits. However I am stick on this not for profit rental limit. According to the IRS publications if we do not show a profit in 2 out of 5 years I believe the IRS can demand we treat this property as a rental not for profit. By doing that we would not be able to offset our wages with the rental loss. I also read if the IRS were to make us treat this as a not for profit rental they could go back and make any losses in the past 5 years retroactive. I guess the short question is if we are expecting losses in the coming years should we just start from day 1 and file this as a rental not for profit?

Second, in determining our basis in the property for depreciation can we include the points and fees from the original 2003 loan? My assumption is no since we deducted those on our 2003 taxes.

Thanks for your help.



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