personal residence rented briefly then sold at loss

[origun]

Taxpayers owned and lived in a house for several years, then moved out of the area for a new job. While waiting for residence to sell, they rented it for 6 months. Then it was sold for a significant loss, even after taking into account the depreciation for 6 months.

So...are they allowed to take a loss? Logic says to me that they can't but our software comes up with one (of over $60,000!).

Thanks for any help.

[solomon]

If it were sold at a gain, would you not apply §121?

[ChEAr$]

Important lesson here

Do NOT rely on any vendor's software to make a tax ruling.

As to the facts, we have to decide is there a magic months/years time horizon which we can
rely on to consider a property true rental property or not. At one time (years ago) I heard
24 months.

What say others?

[S T]

Personal converted to Rental

I have always heard a minimum of 12 months and as much as 24 months as a rental, much the same rules as a 1031 Exchange for personal to rental. I think up until late 2008 or early 2009, it was just an unwritten rule not in the regs, facts and circumstances.

I would probably do the Sect 121, show the depreciation claimed for the 6 months and they have to pay tax on that amount, the rest might be absorbed under Sect 121, I don't think any loss!

Sandy

[ChEAr$]

depreciation

I have always heard a minimum of 12 months and as much as 24 months as a rental, much the same rules as a 1031 Exchange for personal to rental. I think up until late 2008 or early 2009, it was just an unwritten rule not in the regs, facts and circumstances.

I would probably do the Sect 121, show the depreciation claimed for the 6 months and they have to pay tax on that amount, the rest might be absorbed under Sect 121, I don't think any loss!

Sandy

But Sandy, I THINK I looked it up one time and for a temporary rental like 6 months,
just report income on line 21 with no expenses, esp depreciation.

My client had such a case, temporarily renting his former residence until it sold.

[solomon]

If the home were sold in 2008, under Prop. Reg. 1.280A the six month rental period is definitely a "qualified rental period" and not subject to §280A(c)(5) which limits deductions. Nevertheless, after taking the qualified rental period into account, §121 would apply other than for the unrecaptured 1250 gain. Consequently, I see no loss on the sale.

[origun]

depreciation recapture

Do you have to recapture depreciation if sold at a loss? Probably I am mistaken, but I thought it was necessary only when sold at a gain and the gain is excludable under section 121 except for depreciation. The 6 month rental was over 2 years--3 mo in 2007 and 3 mo in 2008. Someone else did the return in '07 but depreciation wasn't taken although allowable. 2008 return is still in a "hold" status!

[solomon]

Do you have to recapture depreciation if sold at a loss? Probably I am mistaken, but I thought it was necessary only when sold at a gain and the gain is excludable under section 121 except for depreciation. The 6 month rental was over 2 years--3 mo in 2007 and 3 mo in 2008. Someone else did the return in '07 but depreciation wasn't taken although allowable. 2008 return is still in a "hold" status!

Per Prop Rule 1.280A, I don't think it would be a qualified rental period and thus subject to §280A(c)(5). As I recall, your six month rental period would have had to occur in the year of sale to be a qualified rental period. Based upon the ordering rules under that section (280A(c)(5), depreciation probably would not even be available.

Here is the language from the Prop Rule:

A “qualified rental period” is a consecutive period of —

(i) 12 or more months which begins or ends during the taxable year, or

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

It appears (ii) limits the deductions.