Personal Use Property

[RLymanC]

Person starts renting out a second home, when does it qualify as investment property verses personal use property. There will be a loss on the sale.

[taxmom34]

personal use property

date placed in service.

[RLymanC]

placed in service

September of this year. He may have used it more than 14 days or 10%.

He has a slight problem here. He purchased for $280,000 the FMV on date put in service was $250,000. Sale price of $250,000, seems there is no way to claim a loss.

No personal use next year and would be rented out continually untill sold by April or May.

Back to my origanal question, when would it be concidered investemnt property

[joanmcq]

personal use isn't an issue once it is converted. No vacation rules if you convert it solely to a rental. so it becomes a rental in september when it was available for rent.

[erchess]

Ok I am totally confused here

OP appears to be trying to claim a loss on a house

For a personal use house gain would be taxable unless the requirements for partial or total exclusion are met, and loss is like any other personal loss - not deductible although since it is a house and the IRS receives notice of the sale, it is reportable on Sch D. I suspect that nearly every user of this board knows all this and the particulars of how to do it in their software.

But I think that by putting it on the rental market, whether or not he actually rents it, he has made the house investment property and regardless of when (after putting it on the rental market) he sells it, gain or loss on the sale would be calculated on Sch D. Basis would be calculated in the usual way and I think there are even worksheets to guide one. Contract sales price is on the form the client brings. What am I missing here? I have sometimes been accused of asking obvious questions on this board but the reason has always been that I in all honesty was not sure of some point and could not think of a way to look it up in the research tools I had. (Probably the problem was in my ability to use the tools rather than in the tools themselves.) The only reason I even bother to make this post is that in my opinion OP has greater overall tax knowledge than I do.

[RLymanC]

Do I have this right??

Thanks for getting my brain out of moth balls.

Property becomes investment property on the date rented out. If in Sept, the depreciation starts, 3 months mortgage interest, prop taxes plus allowable expenses. Add to basis any Cap expenses.

The value for depreciation is the lower of FMV on the date of conversion, or purchase price.

If he sells as personal use property no loss allowed reportable on schedule D.

If rented out it would be a normal sale of depreciable property reported on 4797.

[solomon]

In your case, because it is not a principal residence, would the vacation rules apply for the year of conversion? From §280A(d)(4)

(4) Rental of principal residence
(A) In general
For purposes of applying subsection (c)(5) to deductions
allocable to a qualified rental period, a taxpayer shall not be
considered to have used a dwelling unit for personal purposes
for any day during the taxable year which occurs before or
after a qualified rental period described in subparagraph
(B)(i), or before a qualified rental period described in
subparagraph (B)(ii),

if with respect to such day such unit
constitutes the principal residence (within the meaning of
section 121) of the taxpayer.

(B) Qualified rental period
For purposes of subparagraph (A), the term ''qualified rental
period'' means a consecutive period of -
(i) 12 or more months which begins or ends in such taxable
year, or

(ii) less than 12 months which begins in such taxable year
and at the end of which such dwelling unit is sold or
exchanged, and for which such unit is rented, or is held for
rental, at a fair rental.

[Kram BergGold]

Stop Important Info

Regarding the potential loss. You have multiple claculations to do.
First you compare sales price to cost plus improvments. If no gain then you compare FMV at time comverted to rental to sales price.. If this results in a loss you then compute for loss. If there is no gain in step 1 and no loss in step 2 the sale results in no gain or no loss.

[RLymanC]

Question for Kram

Thank you very much, I thought as much, can you direct me to anything in wtiting, (besides yours,,HA) .

[JON]

Conversion

cost and deprecistion basis is the FMV @ the date you convert. The $250,000 is set up as the asset-land, building etc.

[DaveinTexas]

If a loss, would it qualify as an ordinary loss

Thanks for getting my brain out of moth balls.

Property becomes investment property on the date rented out. If in Sept, the depreciation starts, 3 months mortgage interest, prop taxes plus allowable expenses. Add to basis any Cap expenses.

The value for depreciation is the lower of FMV on the date of conversion, or purchase price.

If he sells as personal use property no loss allowed reportable on schedule D.

If rented out it would be a normal sale of depreciable property reported on 4797.

fully deductible on the 1040 as in the case of a section 1231 asset? I think that a 1231 asset had to be held for over a year in order to qualify for ordinary loss treatment.

If held for one year or less, any loss on this property should be treated as a Short Term Capital Loss, limited to $3,000 per year.

Do I need to get some coffee or I headed down the right path?

[les grans]

I'm confused.

If the holding period is a year or less and the house is sold as a "rental" any tax loss should be an ordinary loss, not a capital or section 1231 loss.

If the value of the property was less than its cost at the time of conversion from personal to rental, does the holding period start when it was converted to rental, or does start when the house was bought?

Does this house have a dual basis, one for gain (over the original purchase cost, less depreciation taken) and a different, lower one (if value on date of conversion was less than cost *and* the house sells at a loss, using either basis)?

[Kram BergGold]

In writing

Check the 2008 Lasser's Tax Guide page 502.

[les grans]

Some sonofagun swiped my copy of Lasser's.