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02-01-2014, 11:35 PM
 Junior Member Join Date: Feb 2014 Posts: 4
Help with Form 4797 and sold rental property for a loss

Hello,
I am needing some assistance to fill out Form 4797 for the sale of our rental home, as there was a loss.
Here's the details and my questions:
Home originally purchased in 2008 for 190,000 and we lived as personal property until 2012. We made improvements to the home during this time.
In 2012, we converted property to rental property. This property sold in 2013 for \$164,000.
I'm trying to figure out when it asks for the date of when home was purchased, do I enter the 2008 date or the date that is was converted to rental property? As far as the original purchase price, I'm assuming I figure the FMV (basis) price at time of rental conversion. I'm a little confused as to how to calculate depreciation for this when asked. Just a note, we also had to come up with cash out of pocket to pay off the loan when we closed, so there were substantial closing costs at time of sale. Is this entered anywhere or is it irrelevant?
Thank you for you help, I'm trying to make sure I calculate the correctly.

02-02-2014, 02:11 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
Quote:
 Originally Posted by millironzb #1;I'm trying to figure out when it asks for the date of when home was purchased, do I enter the 2008 date or the date that is was converted to rental property? #2;As far as the original purchase price, I'm assuming I figure the FMV (basis) price at time of rental conversion. I'm a little confused as to how to calculate depreciation for this when asked. Just a note, we also had to come up with cash out of pocket to pay off the loan when we closed, so there were substantial closing costs at time of sale. Is this entered anywhere or is it irrelevant? Thank you for you help, I'm trying to make sure I calculate the correctly.
#1; the date that is was converted to rental property .Since the sale results in a loss, however, the starting point for basis is the lower of the property's adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property.

#2;no need to recapture the unrecap depre on form 4797 as you sold it for a loss. You need to compute the annual depreciation expense. Annual depreciation expense is computed by dividing the purchase price of the property , as said above, by the useful life. Consequently, if one were to sum the annual depreciation expense for the entire useful life, it will equal the total amount of the purchase price of the property.Reduce earnings by depreciation expense.

02-02-2014, 04:51 PM
 Junior Member Join Date: Feb 2014 Posts: 4
Re: Depreciation of Loss

Thank you for replying and proving that information. Can you tell me how I or what formula I follow to compute the annual depreciation expense and also, where do I enter this? You stated it wasn't recap the depr on form 4797, so where do I enter this? Thank you!

02-02-2014, 05:33 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
As far as the original purchase price, I'm assuming I figure the FMV (basis) price at time of rental conversion. I'm a little confused as to how to calculate depreciation for this when asked. Just a note, we also had to come up with cash out of pocket to pay off the loan when we closed, so there were substantial closing costs at time of sale. Is this entered anywhere or is it irrelevant?============>>>you can deduct other rent related expenses on Sch E of 1040 , NOT on form 4797. Your deductible expenses would be limited to the amount of rental income you have. In other words, you could not offset a loss on the rental against other income you report on your tax return. You can carry forward your excess rent expenses to the following year, but they would be subject to the same limitation - your rental income for that year.

02-02-2014, 05:36 PM
 Junior Member Join Date: Feb 2014 Posts: 4
Can you tell me how I calculate the annual depreciation expense and what form this is entered on? I'm assuming I don't enter depreciation on form 4797? Is that what you stated, since it was a loss?

02-02-2014, 06:02 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
what formula I follow to compute the annual depreciation expense and also, where do I enter this? You stated it wasn't...=====>>> Residential property subject to the 27.5 year recover period is defined as a rental building or structure for which 80% or more of the gross rental income from dwelling units.For example,assume that you purchase a piece of rental property for \$300K. The tax assessor for the county assessed the value of the land to be \$100K and the house to be \$200K. The recovery period for rental property is 27.5 years so Doug would divide the \$200K by 27.5 resulting in \$7,272.73 per year. The gain/loss on the sale of the rental house is reported on Form 4797 and Sch D. Residential rental property is section 1250 property, so Part III of Form 4797 must be completed. The gain calculated in Part III then needs to be entered in Part I of form 4797. The gain reported in Part I will then transfer to Sch D/8949 as a long-term capital gain. For property placed in service after 1986, all depreciation deductions allowable before the sale give rise to unrecaptured section 1250 gain. The portion of the gain that is unrecaptured section 1250 gain is subject to a 25% tax rate and must be reported in Part III of Sch D/8949. The capital gains rate of 15% will apply to the balance of the gain. you will need the accumulated depreciation, and it transfers
to form 4797 in part 3. If the rental was still in service during this year, keep on depreciating and filing a sch E. if it is a loss, then it is an ordinary loss. so rental gain/loss is
computed on form 4797. Line 9 there says if you have a gain then report it if you have a loss then go on and line 18b
says to report on line 14.

Publication 544 (2013), Sales and Other Dispositions of Assets

02-02-2014, 07:39 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
note; assume that HereĀ“s an example: In 2006 you sell your home for \$150K. you bought the house for \$100K four years ago and have taken depreciation deductions of \$2885 for the house used as an rental home. you have a gain of \$52,885 (your adjusted basis is \$100K - \$2885 = \$97,115).\$10K-\$97115 None of the gain is subject to section 1250 recapture, because the property was placed in service after 1981. But \$2885 is an unrecaptured section 1250 gain. If you arein the 28% tax bracket, your tax rate for the \$2885 gain will be \$721.25 (25% of \$2885). The remainder of your gain is excludable, if the house'd be/ is your principal residence.

02-04-2014, 05:45 PM
 Junior Member Join Date: Feb 2014 Posts: 4
Thank you, I believe I understand the calculation now. Because the property is a loss only, not a gain, do I file a loss with the state it's located in as well as our resident state? Our primary residence and other income is in another state. I know I would do this with a gain, not sure how it worked with a loss.

02-04-2014, 06:00 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
Quote:
 Originally Posted by millironzb , do I file a loss with the state it's located in as well as our resident state? .
I GUESS YOU NEED TO CONTACT THE DEPT OF REV OF THE STATE FOR SURE ON THESTATE TAXATION

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