Temporary rental of residence

[LCP]

More and more clients have moved out of their home one way or the other and rented it with the intention of selling it as soon as they are able to.

If it is clear they will have a loss ......... what's the best strategy to try to eventually take the loss on a rental property?

If they are looking at a gain, what's the best way to preserve their exclusion?

[erchess]

Gain or Loss

If they are going to have a gain then they need to sell it asap because of the "nonqualified use" rules that came into effect on 1/1/09.

If they are going to convert it to rental use then they will need to depreciate it because their basis will be reduced by depreciation allowed or allowable. I don't know how long they have to use it as a rental before they can sell it and have a deductible loss. As we all know a loss on a sale of a personal residence is not deductible.

[veritas]

What's the basis

for depreciation?

Could be less than the purchase price because of the drop in real estate values.

[taxmom34]

i'm thinking the cost is still the basis for depreciation

[Kram BergGold]

Non Qualidied Use Does Not Apply

A temporary rental of a primary residence before a sale is exempt from the non qualified use rules.

These people will not necessarily have a very large loss, as loss is computed from FMV at time of conversion not purchase. Although gain is computed for purchase price plus improvements.
As for gain they hust have to sell within 3 years of vacating to get the exclusion.

[LCP]

Does anyone have any additional input or thoughts?

How long can we temporarily rent and preserve the exclusion?

Does "temporary rental" mean that you only deduct interest and taxes to the extent of the rental income. No depreciation and no loss??

What if rents exceed interest and taxes...can other rexpenses be deducted to the extent of the rent?

[Gretel]

i'm thinking the cost is still the basis for depreciation

I disagree. If personal property is converted to biz or other appreciable property the basis is the lower of cost or FMV at time of conversion. I used to always forget about the second part of the equation.

[Burke]

Does anyone have any additional input or thoughts?
How long can we temporarily rent and preserve the exclusion?
Does "temporary rental" mean that you only deduct interest and taxes to the extent of the rental income. No depreciation and no loss??
What if rents exceed interest and taxes...can other rexpenses be deducted to the extent of the rent?

I am thinking the IRS is not going to come down too hard on a TP in this market who is renting a house but still actively trying to sell it. More than 1 year, and you might have a problem. Facts and circumstances. Usually, there is always a price at which it will eventually sell. And yes, it would be a not-for-profit rental, declaring income and taking expenses up to that income, no depr, no loss.

[LCP]

Another tax preparer stated to me that conversion to a rental after it's use as a personal residence does not result in the same exclusion adjustment as it would if it had been a rental before and then became the personal residence.

Correct?

[DonPriebe]

Another tax preparer stated to me that conversion to a rental after it's use as a personal residence does not result in the same exclusion adjustment as it would if it had been a rental before and then became the personal residence.

Correct?

Correct. From http://www.irs.gov/publications/p523...link1000240774

Exceptions. A period of nonqualified use does not include:

Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home;

[JenMO]

Have the rules changed or not on non qualifing use, rental before sale. Couple moves and buys new residence, rents for a year to the tenant who finally gets a loan to buy. How is this reported exclusion wise. I took deprec the first year, thought you were supposed to, you know, allowed or allowable. Was I wrong, can I amend? I'm lost.