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Old 08-05-2012, 02:21 PM
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Primary to rental to primary to rental for Active Duty

Greetings,
I am active duty US military and own a condo in Virginia which I purchased and resided in as primary residence from 2000-2005, rented from 2005-2009 while transfered overseas (depreciated under MACRS) and moved back into as primary residence from 2009-2012 while stationed back in Virginia. I started renting it again this spring after being stationed in California where I am now. I had/have property management but I approve new tenants, determine rental terms and approve expenditures, so I consider it active participation.
Firstly, how do I compute MACRS now?
Do I continue the schedule from where I left off when I stopped renting the property in 2009? Or do I start over from scratch with the current 2012 tax value.
Also where does the Military Family Tax Relief Act of 2003 fit in since I was transfered over 50 miles away under orders. I bought it for 72k and the current tax value is 147k. I understand that capital gains under 250k should be tax free but I am unclear as to how/where the depreciation is factored and how the property being a rental affects it legally should I decide to sell in the future.
Many Thanks!



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Old 08-05-2012, 09:35 PM
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“I started renting it again this spring after being stationed in California where I am now. I had/have property management but I approve new tenants, determine rental terms and approve expenditures, so I consider it active participation.”---->In general, when you make money through rental property rents, it is generally considered passive income. It arises more out of the property itself than a service you are providing. If you lose money, it's a passive income loss or, simply, passive loss. A gain is taxed as ordinary income. How a loss is handled depends on whether you actively participated in the rental activities. If you did not actively participate in the rental business, you may only deduct passive losses from passive gains, such as from other rental property. If you do not have passive gains, you can carry the passive loss backward or forward to other tax years in which you do have passive gains to offset. If you did actively participate, you are able to deduct up to $25,000 in passive loss from non-passive income, such as wages from your job. To meet the active participation test, you must have actively participated in your rental property's management, specifically in management decisions. The IRS provides examples of active participation as advertising units, collecting rents and making or arranging for repairs. It clarifies, however, that the term active participation is a less stringent standard than material participation applicable to real estate professionals. To actively participate you do not have to handle every aspect of management. If you approve new tenants, determine rental terms and approve expenditures, you have met the test.
` “Firstly, how do I compute MACRS now? “---->Generally, according to the IRS, "you must use the MACRS(s/l method) to depreciate residential rental property places in service after 1986.The S/L MACRS realty tables for residential rental pty provides for depre over 27.5 years. Fo example, assume that you buy a rental house on Sep 30, 2010, for $90K(the land is accounted separately). Then the annual depre expense deduction under MACRS for 2010 is $90K*1.0961%=$955; for 2011; $90K*3.636+$3272 so on …
MACRS table for rental property: MACRS Depreciation Tables
“Do I continue the schedule from where I left off when I stopped renting the property in 2009? Or do I start over from scratch with the current 2012 tax value. “---->As described above, you can continue the schedule where you left off when you stopped renting it since it is the same house. You begin to depreciate your rental property when you place it in service for the production of income. You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. As long as you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. You can even continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle.HOWEVER, when you dispose of it as rental/as residential, you mUST recapture unrecap depre on r/e as ordinary income taxed at 25% AS LONG AS you have sufficient LTCG that you earn on the sale of the pty(UNLESS you have NOL carried over or LTCL).
“Also where does the Military Family Tax Relief Act of 2003 fit in since I was transfered over 50 miles away under orders.”----> Under current law, an individual taxpayer may exclude up to $250K ($500K if MFJ as said above) of gain realized on the sale or exchange of a principal residence.Prior to MFTRA 2003, to be eligible for the exclusion, you must have owned and used the residence as a principal residence for at least two of the five years ending on the sale or exchange. If you don’t meet these requirements because of a change in place of employment, health, or, to the extent provided under regulations, unforeseen circumstances, you were able to exclude an amount equal to the fraction of the $250K ($500K ifMFJ) that is equal to the fraction of the two years that the ownership and use requirements are met (see IRC section 121).But for sales or exchanges after May 6, 1997, MFTRA permits a military servicemember to suspend, for a maximum of 10 years, the five-year period for home ownership and use during certain absences, due to service in the uniformed services or the foreign service. If you choose, the five-year period ending on the date of the sale or exchange of a principal residence does not include any period up to 10 years during which you or your spouse is on qualified official extended duty as a member of the uniformed services or foreign service.For these purposes, qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles from your principal residence, or under orders compelling residence in government-furnished quarters. Extended duty is defined as any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

“ I bought it for 72k and the current tax value is 147k. I understand that capital gains under 250k should be tax free but I am unclear as to how/where the depreciation is factored and how the property being a rental affects it legally should I decide to sell in the future.”---->As described above, I guess you are NOT subject to unrecap depre on yur r/e; you who sell your primary residence can exclude up to $250,000 (or up to $500,000 for married couples filing jointly) in capital gains from your taxes as long as the amount of your LTCG is LESS than $259K/$500K as MFJ.



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Old 08-06-2012, 04:23 AM
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Thank you.



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