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Old 10-12-2012, 08:51 AM
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How to treat sale of Investment real estate converted from Rental Property.

I sold a property in 2011 that I held approx 6 yrs. I rented the house out for the first 2 years and it was vacant the remaining years. I did not use the property myself. For the first 2 years I completed Sch E and claimed depreciation. From the 3rd year on, I did not complete Sch E. since it was not used for business. If I recall correctly, my research at the time of conversion indicated I could convert the property to "investment property" but could only claim some limited deductions on Schedule A for the last 4 years. So which forms need to be completed regarding this sale on my individual Tax Return? Also, I would think I need to add prior depreciation taken to my cost basis. The property sale resulted in a loss. If possible, I would rather take a long term capital loss which I could carry forward. I do not need any ordinary losses for 2011. Thanks for any guidance.



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Old 10-13-2012, 05:23 AM
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“I sold a property in 2011 that I held approx 6 yrs. I rented the house out for the first 2 years and it was vacant the remaining years. I did not use the property myself. For the first 2 years I completed Sch E and claimed depreciation. “---->It depends UNLESS you are a r/e dealer or a professional, your rental income is passive income; as long as 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, whichever is greater, the residence is treated as rental pty.The expenses must then be allocated between the person and rental days. If this is the case,the rental expenses may exceed the rental income, and the resulting loss’d be deducted against other income subject to the passive loss rules. However, if the residence is rented for 15 days or more and was used for personal purposes for more than 14 days or 10% of the days rented, whichever was greater, allocable rental expenses are allowed only to the extent of rental income. In both cases, you need to report your rental income on Sch E and you also need to deduct your rental expenses (for personal purposes), mort , r/e taxes or interest on Sch A of 1040.
“From the 3rd year on, I did not complete Sch E. since it was not used for business.”---->As described above, you need to report your rental income / expenses on Sch E UNLESS you rented yur residence for fewer than 15 days during the year.If the residence was rented for fewer than 15 days I the 3rd year, then it is treated as a personal residence for tax purposese; you do not need to report any income on your return, however, yu can deduct your r/e taxes, mort interest on your Sch A
“ If I recall correctly, my research at the time of conversion indicated I could convert the property to "investment property" but could only claim some limited deductions on Schedule A for the last 4 years.”---->As described previously it depends on the situation.
“ So which forms need to be completed regarding this sale on my individual Tax Return? “---->UNLESS your residence is rental pty, you do not need to file Form 4797 but you need to file form 8949/Sch D. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). As long as you owned the residence for any two of the last five years. You occupied your residence for any two of the last five years; you haven't used the exclusion within the last two years.If you can exclude all of the gain, you do not need to report the sale on your tax return.If you have gain that cannot be excluded, it is taxable. Report it on Sch D (Form 1040).
“Also, I would think I need to add prior depreciation taken to my cost basis.”----->No on the contrary yo need to subtract prior depreciation taken from your adjusted cost basis; When you converted from rental to residence it was considred a disposition, so that the adjusted basis of the rental became the basis of the residence;you need to recapture the unrecaptured depreciation ONLY when you dispose of the pty.A special 25% tax rate applies to the real pty gains attributable to depre previously taken and not already recaptured under the sec 1245 or sec 1250 rules. Any remaining gain attributable to unrecap depre previously taken, including S/L depre is taxed at 25% rather than the LTCG rate of 0~15%.HOWER, as long as you have net operating loss(or LTCL carryover) exceeding LTCG, then your unrecaptured deprec ‘d be offset.
“ The property sale resulted in a loss. If possible, I would rather take a long term capital loss which I could carry forward. I do not need any ordinary losses for 2011.”---->Then, as long as the LTCL exceeds the unrecaptured depreciation, you do not need to recapture the depreciation previously taken.



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