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Old 03-27-2012, 09:38 AM
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Converting primary to rental

I own a property in Westchester County that i would like to convert from my primary to a rental. I have lived / owned it for 5 years with my wife. Based on recent sales in the area i stand take a $50-$100k loss if i sold. How long will i need to rent the property before i can sell it and realize the benefits of any loss associated with a sale - assuming their is no meaningful market recovery.

From a tax calculation perspective what % of that notional amount will i actually realize - will it be my tax rate times that notional loss.

Further what is the process from a documentation perspective to convert the property so once i sell it at a loss i can provide proof it was a rental property to NYS and IRS.



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Old 03-28-2012, 10:10 AM
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“ How long will i need to rent the property before i can sell it and realize the benefits of any loss associated with a sale - assuming their is no meaningful market recovery. “------->To put it simply, no. You cannot deduct the loss on the sale of a personal residence. Therefore you cannot deduct the loss on your taxes.The house was not an income producing property. Most of the time you owned it, you lived in it or were trying to sell it. It was not held as an investment. You cannot deduct a loss on the sale of the house. I mean as a primary or secondary house, the loss is not deductible.However,if you transfer your personal residence to rental/investment property and then take a loss on the sale,( the rental/investment tax basis of the property will be the LESSER of your cost basis or the property's FMV on the date of its conversion from personal to rental/investment use.), the loss is an ordinary loss; Let’s assume you do expect a tax loss from selling your rental property you’ve owned for more than a year. That loss will be a Section 1231 loss which can be a good kind of loss to have; section 1231 losses can be used to reduce any type of income you may have i.e., salary, bonus, self-employment income, capital gains, or etc. ALSO, you may have a net operating loss ,NOT capital loss, if the Section 1231 loss is large enough to reduce your other income below zero. If so, you can carry back the NOL for at least two years and use it to offset taxable income in those years. In doing so, you can recover some or all of the taxes you paid in those previous years by amending those returns.However, your gain on the sale of the rental pty is LTCG; rules in effect since 2008 result in the taxation of rental property profits at no more than 15 percent if the property has been owned for at least a year. The same profits are taxed at ordinary tax rates, up to 35 percent, if the property has been owned for less than a year. For example, after 2012, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% or lower tax bracket). When you dispose of the rental pty, you need to recapture your unrecaptured deprecation . A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1245/1250 rules. Any remaining gain attributable to unrecap depr previously taken, including S/L depre is taxed at 25% rather than LTCG rate of 15% or 0% for up to 2012. Once again, you may exclude up to $500,000 of the gain if you’re married and file jointly, and up to $250,000 if you’re single, recovert your rental pty into primary home and if you’ve owned and lived in the house for two of the previous five years.If you move into a rental property you acquired through a 1031 tax-deferred exchange, the rule is more stringent. Instead of needing to own and live in the house for two of the previous five years, you must actually own the house for five years and live in it for two of the previous five years to take the exclusion.



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