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    Converting a Home to a Rental

    John converts his personal residence to a rental property five years ago. The house original cost was $200,000. Its FMV was $135,000 when it was converted into a rental. Over the 5 years, $10,000 in depreciation was taken. John sold his property for 145,000.

    1. Original Cost $200,000
    2. FMV on Conversion date $135,000
    3. Depreciation Taken (straight Line) $10,000
    4. Basis for tax loss (line 2- line 3) $125,000
    5. Basis for tax gain (line 1-line 3) $190,000
    6. Net Sales Price $145,000
    7. Tax Loss (excess of line 4 over line 6) None
    8. Tax gain (excess of line 6 over line 5) None

    John has NO gain or loss, even with incurred “economic” loss ($200,000-$145,000).

    QUESTIONS:

    1) Will John still be liable for unrecaptured depreciation ($10,000)?
    2) Is this depreciation calculated as 1) UP TO (Maximum) 25% rate OR 2) always FLAT 25%?
    3) If he waits and sells his rental unit for $201,000, would his taxable amount be only $1,000 (smaller of gain OR Depreciation recapture)?

    Many, many thanks for your inputs, suggestions, and ideas!!!

    #2
    1) No.

    2) "Up to", but see #1.

    3) No, he has a Gain of $11,000. $10,000 is Unrecaptured Section 1250 Gain, and $1000 is long-term capital gain.

    Comment


      #3
      Originally posted by TaxGuyBill View Post
      1) No.

      2) "Up to", but see #1.

      3) No, he has a Gain of $11,000. $10,000 is Unrecaptured Section 1250 Gain, and $1000 is long-term capital gain.
      Thank You VERY Much!

      Question #1 – I know that the Section 1250 recapture provisions only apply to gains, not losses, but I was not sure if it works the same in this scenario (no gain or loss).

      Will this $10,000 of unrecaptured depreciation be a part of his (carryforward) 5-year look back 1231 ordinary loss in case he has future gains?

      Comment


        #4
        He is not claiming a 1231 loss, so no.

        Comment

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