“We have a second home that we are about to sell. We have owned it 4 years It is currently worth about $50000 less than what we paid.I wonder if I structure the deal as a rent to buy agreement whether I will be able to claim capital losses. I propose to sign a rent to buy agreement with rent paid in 2012 and close on property in 2013. Rent would be for 4.5 months.”----> Your second home is considered a capital asset. You need to use Form 1040, Schedule D to report sales, exchanges, and other dispositions of capital assets. The IRS only allows you to deduct the loss if you use your second home as a rental or for other investment purposes. The IRS provides an additional tax benefit for some of your capital losses in the form of a $3,000 annual deduction from your other non-capital taxable income. However, this deduction is only available for your investment property losses. Therefore, if your second home is personal-use property, a deduction is unavailable for the loss that remains after eliminating capital gains with it. But if you use the second home for investment purposes, you can claim the deduction. Although you can carry excess capital losses forward to reduce future capital gains, only the investment losses you carry forward are eligible for future $3,000 deductions. As long as your second home is rented for 15days or more and is used for personal purposes for not MOER than 14 days or 10% of the days rented, whichever is greater, the residence is treated as rental property. The expenses then be allocated between the personal and rental days. For example assume that in 2012, you rented your second home for 130 days and used it for personal purposes for 12 days, then your personal use was fewer than 14 days, the greater of 10% of the days rented (130 days), 13 days, or 14 days(14>12 days).So, your second home is rental property. Loss is deductible in three situations only:
a. if it was used or meant to be used as a rental property
b. if it was held as an investment for appreciation
c. if it was purchased and sold as part of your buy-sell (aka flipping) business
If it was meant to be a personal residence - the loss is considered personal loss and is not deductible.
“I would be responsible for taxes, insurance, upkeep etc. I would take appropriate deductions, depreciation and claim rental income. Is this an appropriate structuring of the sale or will IRS challenge me?”---->I do not think so asl ong as you meet the requirements; the expenses then be allocated between the personal and rental days. For example, as long as you make your second home available as a rental for part of the year, and use it for personal use the rest of the time. In this situation, you determine the percentages of personal use and of rental use, and allocate eligible expenses between Sch A and E. Standard Tax Deductions for your second home/ vacation property, apply if you meet the IRS requirements as said above( personal purposes for NOT more than the greater of 14 days or 10% of the days rented, whichever is greater) if your second home is an investment, such as a rental property, you must reduce your tax basis for the cumulative amount of depreciation deductions you claim on the home up to the date of its sale. For example, if you purchase a rental home in 2010 for $200,000 and claim two years of depreciation deductions totaling $14,242 up to the date of sale in 2012, you must reduce the tax basis to $185,758 for purposes of calculating your loss on the second home. On the sale of the home, you need to recapture the cumulative depreciation under real estate 25% recap rule as long as you have sufficient LTCG on the sale of the home.
Last edited by Wnhough : 07-02-2012 at 09:42 AM.