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Old 06-01-2011, 02:33 PM
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Capital Losses of Home Converted into Rental Property

My situation maybe unique, but may not so be, given the current economic climate.

I have a home used as a primary home that was put on sale when moving to a different state in July 2010 - for tax purposes, I am treating this home as a second home - to deduct the mortgage interest. Unfortunately, the home has not been sold.

I am looking into converting the home into a rental property - with a 9-month to 1-year lease, with hopes to put the home up for sale again next year.

Questions:
(1) Can I treat the mortgage interest paid for the time it is termed a second home as mortgage interest deduction? And then treat the mortgage interest paid for the time it is rented out as rental expenses?
(2) Would I be able to claim capital losses on the home AFTER the rental period ends, and the home is sold (at a lower price that I bought it)? If so, how do I calculate the cost basis for this capital loss?
(3) Would a home considered a second home be deducted as capital losses if the home is sold at a lower price than bought?

Thanks.
G



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Old 06-01-2011, 09:29 PM
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“(1) Can I treat the mortgage interest paid for the time it is termed a second home as mortgage interest deduction?”--->After you convert your second home into a rental property, you can deduct your mortgage interest expense; I mean you generally can deduct yearly expenses incurred in the rental property in calculating taxable income or loss include "ordinary and necessary expenses, i.e., taxes, interest. Depreciation, repairs and maintenance, insurance or etc. paid or incurred during the taxable year for the production or collection of income.You, as an individual renting a dwelling unit come under the passive activity rules as inmany cases, then under the passive activity rules, your losses from the rental pty. are generally not allowed. However, any passive losses may be offset against other passive income. The hobby loss rules do not apply to a complete conversion of a personal residence to rental property since your entire property is income-producing property.Your rental property is subject to depreciation recapture ; depreciation recapture rule on real property is a specially taxed type of capital gain. Recapture involves taking the prior depreciation deductions back into income, and it occurs at the sale of a property. You need to recapture the excess of the accelerated depreciation over straight-line as ordinary income. I guess if you take a loss, LTCL, I mean, then as long as you have a capital loss carryover, the capital loss carryover(depending on the loss amount) to offset the depreciation recapture tax on the sale of rental property; so you may or may NOT be subject to the recapture rule.Sec 1250 depr. Recap. maximum tax rate that applies is currently 25 percent(Real estate sold after May 7, 1997 is recaptured at a 25% rate).However, in general,when you take a loss on the sale of an asset, there is no depreciation recapture. The IRS includes depreciation recapture in the tax law so you are liable whether you use it or not. You must recapture depreciation you actually claim or could have claimed for renting out the house.
“ And then treat the mortgage interest paid for the time it is rented out as rental expenses?”---->Yes. As said above.
“(2) Would I be able to claim capital losses on the home AFTER the rental period ends, and the home is sold (at a lower price that I bought it)? If so, how do I calculate the cost basis for this capital loss?“(3) Would a home considered a second home be deducted as capital losses if the home is sold at a lower price than bought?”--->It depends; if the home is sold( as a residential home NOT rental home) at a loss, the CL is NOT deductible; a loss on the sale of a home is not tax deductible.However, a as long as you sell the home as a rental home, then the loss from the sale of the rental property is tax deductible as an ordinary loss. Ordinary losses are deductible in full against your ordinary income,i.e., your wages, salaries and interest you earn.Also when selling a rental house at a loss, the loss may actually turn out to be smaller than you’d expect. While you were renting it out, you were most likely depreciating the cost of the house on Schedule E. When you sell the house, your cost basis in the house is reduced by the amount of depreciation you’ve taken as said above, which makes for a smaller loss.


Last edited by Wnhough : 06-01-2011 at 09:57 PM.


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Old 07-14-2011, 06:07 AM
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My question is that, If I have mortgage and then invest this in buying anther property and I use this property as rent gaining ,Then what will be the taxes phenomenon as I am not investing my personal amount , its mortgage,Whether it will reduce or compensate.Thanks in advance.



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Old 07-14-2011, 07:04 AM
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“My question is that, If I have mortgage and then invest this in buying anther property and I use this property as rent gaining .“--> Assume that you are on a fixed rate/ adj rate mortgage( FHA Loan) whatever it is, but you are thinking of buying another property and moving to that, and renting this one out. Then you don’t need to change your mortgage to buy to let. However,you would need to let your mortgage company know if you are renting out the property.For example, the FHA home loan program does not forbid owners from renting out their home, but it does require its buyers to move into the house and establish it as their place of residence within 60 days of the closing. FHA also requires the buyers to live in the house for at least one year from the day they moved in before offering it to renters. I guess you should NOT break the rules on renting out a home with an FHA mortgage, thinking you won't get caught, because federal workers do routine spot checks of properties. If you rent out your home before you have lived there for at least a year, you can be penalized with a fee that is explained in the loan documents.
“Then what will be the taxes phenomenon as I am not investing my personal amount , its mortgage,Whether it will reduce or compensate?”--->I guess it depends; In general, you must include in your gross income all amounts you receive as rent. However, if you rent property that you also use as your home and you rent it fewer than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. However, you can STILL deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. If the residence is rented for 15 days or more and is used for personal purposes for NOT more than 14 days or 10% of the days rented, h=whichever is greater, the residence is treated as rental property. Then the expenses must then be allocated between the personal and rental days. And if this is the case, then the expenses may exceed the rental income and the resulting loss’d be deducted against other income,PROBABLY UNLESS you are subject to active/material participation to management of the rental residence, subject to the passiv eloss rules. If the reside ce is rented for 15 days or more and is used for personal purposes for more than 14 days or 10% of the days rented, whichever is greater,allocable rental expenses are allowed only to the extent of rental income. Allocable expenses are deducted in separate steps: interest and taxes are deducted secondly, maintenance / repair expenses are deducted against rental income(positive income I mean) and finally , depreciation expense is deducted.When you dispose of your rental residence, you are subject to SEC 1250 unrecaptured deprec. rule UNLESSv the use of the straight line method is required(After 1986, there will be no Section 1250 recap on the dispostion of real property).The rule applies to property gains attributable to depreciation previously taken and NOT already recaptured UNDER the SEC 1250.Instead unrecaptured deprec. recapture on real estate will be taxed at 10% or 15% to the extent of the remaining amount in the 10% or 15% tax bracket(your personal marginal tax rate, I mean) and then 25% as long as your tax bracket is 25% or exceeds 25%.


Last edited by Wnhough : 07-17-2011 at 11:01 PM.


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Old 07-20-2011, 01:29 PM
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Check out the income from rental house and interest on mortgage .you got loan use for purpose full and get reasonable income. Both income tackle in difficult movement in this way you will able to pay interest on mortgage.



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