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Old 05-24-2012, 02:36 PM
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Loss on Sale of Rental - Are there limits to loss deductions

I have a condo I have been renting for 2 years. I lived in it prior to renting it out. I am thinking about selling the unit and when I do, I will most likely have to sell it at a loss of about $60K. Will I be able to deduct the entire loss of $60K? I have never deducted depreciation on the unit. I am also wondering how do you determine the tax basis for a given property? Any help would be greatly appreciated. Thanks.



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Old 05-25-2012, 07:56 PM
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“I have a condo I have been renting for 2 years. I lived in it prior to renting it out. I am thinking about selling the unit and when I do, I will most likely have to sell it at a loss of about $60K. Will I be able to deduct the entire loss of $60K?”----->So, you converted a residence to a rental property, then, you do expect a tax loss from selling the rental property you’ve owned for more than a year. That loss will be a Section 1231 loss, an ordinarly loss( NOT LTCL)which can be a good kind of loss to have since Sec 1231 losses can be used to reduce any type of income you may have -,i.e., salary, bonus, self-employment income, capital gains, you name it. You may have a NOL if the Sec 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(carry forward for 20 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.If any of the NOL is left over after going back two years, you can carry the rest forward into future tax years to offset future income (for up to 20 years). Alternatively, you can choose to not to carry it back and just carry it forward for 20 years.
“ I have never deducted depreciation on the unit.”----> Although you can opt to not claim the depreciation, you will be treated as if you did. End effect is that you give up the tax benefit associated with the depreciation you did not claim, but will have to pay tax , 25%, on the profit when you sell the property as if you did claim the depreciation; depreciation recapture can cause a significant tax impact for people who are selling residential rental properties. Part of the gain will be taxed as a capital gain and may qualify for the maximum 0%-15% rate (depending on your personal marginal tax rate) on long-term gains. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate
“I am also wondering how do you determine the tax basis for a given property? “---->When you convert a personal use asset such as a home to business property such as a rental property, your basis for calculating future loss becomes the lower of the property's fair market value or cost.



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