Hi ATG,

I purchased a rental property in 1998 which i converted to personal use in 2006 then reconverted to rental property in 2012. I'm at a loss as how to enter this on my 2012 tax return; can you please advise me?

thanks, Mike

“ I'm at a loss as how to enter this on my 2012 tax return; can you please advise me?”===========> Losses you incur from unloading investment properties can receive very favorable tax treatment;you do not need to pay tax on unrecap depre previously taken. On the sale of rental property you need to deduct any amount depreciated from the initial cost basis. On the other side, any capital improvements you have done to the property needs to be added to the initial cost basis. Unrecap depre is usually treated as ordinary income axed at 25% UNLESS your marginal tax rate is lower than 25%.ALSO, as long as you ‘ve owned the property for a long time, its tax basis may be a lot lower than you think as a result of the depreciation factor. Therefore, you might trigger a tax gain if you sell even though it may feel like a loss because you sold at such a low price. So, When selling a rental house at a loss, the loss may actually turn out to be smaller than you’d expect. While you were renting it out, you were most likely depreciating the cost of the house on Sch E. When you sell the house, your cost basis in the house is reduced by the amount of depreciation you’ve taken, which makes for a smaller loss; a loss from the sale of a rental property is tax deductible as an ordinary loss. Ordinary losses are deductible in full against your ordinary income (like your wages and interest you earn, for example). when it comes to selling the home you live in (that is, your primary home) at a loss. Unfortunately, there is no tax deduction if you sell your primary home at a loss. It’s kind of a subtle point, but the ordinary loss from the sale of a rental is not the same thing as a passive loss from operating and depreciating rental real estate.
The sale of an asset used for business purposes, such as a home that is rented for income, is reported on IRS Form 4797 and 1040 line 14. If there was any rental activity in the year the property was sold, the rental income and expenses are reported on Sch E, just as it was in prior years. Only include rental income and expenses up until the date of sale on Sch E. The sale of rental real estate must be reported on your federal and state tax returns.