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Old 02-11-2013, 01:23 AM
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Can sale of rental fall between gain and loss

My wife and I are horribly confused with the potential sale of our rental.

We purchased our home in AZ for $350k in 2005 and used it as our primary residence until 2011, when I took a job in another state. The market was horrible, so we rented it out and plan on renting it out for another 5-7 years. The fair market value (FMV) was approx. $210k in 2011.

If we were to sell the house in a few years for $250k (which is unlikely, but makes for easy math) and claiming $20k in depreciation, it seems the sale falls between gains and losses. How do we report this in our taxes? We aren't planning on ever claiming a loss on the sale from a business perspective, but shouldn't a gain be calculated using the original purchase price and not the 2011 FMV?

This was my understanding of IRS Pub 551, but I'm putting sample numbers in TurboTax, and it keeps reporting a $20k gain on the sale. If we're going to be taxed on the gain from the value when we converted to a rental, I think we'd rather take the loss and sell the house within the 5 year window to avoid capital gains tax. Any thoughts?


Last edited by wilbur2009 : 02-11-2013 at 12:35 PM.


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Old 02-11-2013, 05:59 AM
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If we were to sell the house in a few years for $250k (which is unlikely, but makes for easy math) and claiming $20k in depreciation, it seems the sale falls between gains and losses. How do we report this in our taxes? “======>then your LTCG is $60K;$250K(FMV)- $190K(Adj basis; Increased by the cost of any permanent improvements or additions and other costs that must be added to the basis.Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.) I assumed you excluded value allocated to land;however, you need to recapture the unrecaptured depreciation, $20K, taken previously and $20K of $60k is taxed as ordinary income, NOT as LTCG. For example, when your tax rate is only 10 OR 15% , the depre recap will be taxed at 10 or 15% to the extent of the remaining amount in the 10 or 15% bracket and then at 25%. If you reconvert the rental pty to primary residence when you dispose of it and in the 5 years prior to the sale of the house, and have lived in the house for at least 24 months in that 5-year period as your principal residence, then, you can exclude up to $250K in profit from the sale of a main home (or $500K for a married couple) ;however, even in this situation the unrecaptured depre of $20K ‘d reduce the LTCG exemption amount by $20K. Also, rental properties can be sold as part of a like-kind exchange to defer both capital gains and depreciation recapture taxes. When you recovert your rental pty to residential, Your basis in the property is your cost of the property plus closing costs on the loan plus any improvements made to the property that have a useful life of more than one year, such as roof or air conditioning replacement. Basic repairs are not considered improvements to the property.And you need to reduce your basis in the property by all depreciation claimed on your tax return while the property was rented. Other reductions to basis include items such as casualty losses previously taken as a tax deduction and certain residential energy credits. Refer to IRS publications for exact rules for calculating basis for the year you sell your home.



“We aren't planning on ever claiming a loss on the sale from a business perspective, but shouldn't a gain be calculated using the original purchase price and not the 2011 FMV? “===========>Your basis for gain/loss on the sale of the rental pty(the pty converted to rental a you said) is the FMV $210K in 2011. , remember you also need to determine the amount to allocate to land. Depreciable basis is the lower of adj cost or FMV. Depending on the improvements you may be able to get them appraised separately.



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Old 02-11-2013, 07:28 PM
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Quote:
Originally Posted by Wnhough View Post
Your basis for gain/loss on the sale of the rental pty(the pty converted to rental a you said) is the FMV $210K in 2011.
Thank you for the reply. For some reason my previous responses are not displaying, so I'll try one more time. I'm reviewing IRS Pub 551 and it has the following:
Property Changed to Business or Rental Use

Sale of property. If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss.

Gain. The basis for figuring a gain is your adjusted basis when you sell the property.
Isn't the adjusted basis the original purchase price? Perhaps this doesn't apply in this case, but I couldn't find anywhere that said it would have to be within 3 years of changing to a rental. Can you explain where I'm going wrong?



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Old 02-12-2013, 12:50 AM
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“Isn't the adjusted basis the original purchase price? “=====>As said previously, when you convert your residence to rental pty, depreciable basis is the LOWER of adj basis or FMV; Whenyou recover the rental pty to residence, then your basis is the original purchase price of the pty. You need to remain in the home for a minimum of two years of the five years preceding a sale of the home. For example, if you rented the property from Jan 2008 to Dec 2010 and moved back in the home Jan 2010, you must remain in the home until Jan 2012 in order to avoid capital gain taxes on the entire profit from the sale of the home. The IRS considers a property personal use if it is occupied by the owner a minimum of two years of the five years prior to a sale. If the property was properly converted to personal use by the two-year residence rule, you can exclude a portion of the first $250k ($500k if filing jointly) of profit from the sale from capital gains tax.
“Perhaps this doesn't apply in this case, but I couldn't find anywhere that said it would have to be within 3 years of changing to a rental.”=====>No I don’t think so;I don’t think it would have to be within 3 years of changing to a rental.HOWEVER, if your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the IRS proposing to disallow deductions attributable to the activity.
“ Can you explain where I'm going wrong?”=========>Please read above and visit the IRS Website here for more info in detail; Publication 527 (2012), Residential Rental Property



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Old 03-29-2013, 03:45 PM
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no man's land of neither gain nor loss

Firstly - thanks very much for the free advice that your provide.
However, the response you provided above may be misleading.

The question is: should the cost basis be the original purchase price (adjsuted for improvements and any depreciation taken) or the FMV at the time of conversion to rental (again adjusted for improvements and depreciation). You suggest it should be the latter.

IRS pub 551 (page 10, bottom of the middle column) seems pretty unambiguous in stating that it is the former when a gain is being reported and the latter only when a loss is being claimed. Eg, consider a property purchased for 100k (forgetting about cost of land for now), placed in rental a few years later, at which time FMV was 50k, then depreciated 10k. If sold for a gain the basis is 90k (100k-10k); if sold for a loss, the basis is 40k (50k-10k). If the property sells at less than 40k, a loss can be claimed; it it sells for more than 90k, a gain must be reported; if it sells between 40k and 90k neither a tax loss nor gain will be considered to have occurred.



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Old 03-29-2013, 11:02 PM
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It depends on the amount of the basis when you bought it. Ok , you said, the pty was purchased for $100K(so $100K was the FMV forgetting about depre) in this example, what was the basis of the pty ??? UNLESS the basis of th epty was more than $100K, your basis’d be LESS than $100K;I mean Assume that you bought it for $100K(FMV) and its basis was $70K(before the depr of $10K), and you sold it for $50K, then your loss’d be $10K;$70K-$10K(depre)-$50K.For a pty given as a gift, also assume that the basis of the pty was $120K before the depre of $10K, and you sold it for $50K, then your loss’d be $40K;$100K-$10K-$50K.If you sell it between $100K and $120K(before the depre of $10K), then neither a tax loss nor gain will be considered to have occurred.If you sell it for $150K, your gain’d be $40K;$150K-$10K-$120K.



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