Home to rental then sold 5 months later .. loss?

[Davc]

The basis for depreciation when you convert from a personal residence to a rental is the lower of FMV or adjusted cost.

The basis for the property when you sell it is adjusted cost.

Maribeth

Not quite. You have a dual basis. For a loss it's the lower of FMV or cost on the conversion date - depreciation taken. For a gain it's adjusted basis.

[joanmcq]

I agree with Maribeth. Not much of a loss in 5 months and you do have the 5 months of depreciation to recapture (the reason you have partial year depreciation is that personal property uses the half-year covention and real estate is mid-month). You use the lower of basis or FMV on the date of conversion not only for the depreciation basis, but also for the basis for the loss. So if they bought at the top of the market, the decline from purchase date to date of conversion is a personal loss and non-deductible.

[ChEAr$]

And don't thing that a written lease controls. All my clients rent out houses without any formal documentation; all month to month.

[Maribeth]

Thanks for your additional comments .... I really wasn't insisting on anything. I was looking for something authoritative........ absent that, yes I am inclined to do what I think is reasonable as long as the client understands the issue.

I did reduce the basis to the FMV and the loss is not that big as a result.

The basis for depreciation when you convert from a personal residence to a rental is the lower of FMV or adjusted cost.

The basis for the property when you sell it is adjusted cost.

Maribeth

[Jesse]

One could say anything but renting on a month to month basis and up for SALE at the same time is not the intent to rent. Loss not deductible..............

I didn't catch that in the original post.

Maybe they had a 12 month lease. What if the tenants ran a drug house and the neighbors couldn't take it - so they offered to buy the house. The owner of the house was fed up with the tenants after 5 months of complaints and calls from the police, found lease violations so justifiably evicted the tenants and took the neighbors up on their offer.

Yes, they can say anything, but if they can bear proof that backs up what they say, why can't it be a loss?

Yes, I highly doubt this be the case but isn't that why you would have to consider all facts and circumstances?

[BOB W]

I am in exact agreement with Harlan.

Why couldn't it be possible the true intent was to turn the house into rental property?

Did they have it for sale and rent the home out to cover costs while the house was for sale? Personal property - no loss.

Was the true intent to rent the house but someone unexpectedly made an offer and the taxpayer decided after 5 months of dealing with tenants they jumped at the chance to sell it? If this is the case I think you then need to show the intent. Can you do this beyond any reasonable doubt? What evidence might show true intent was to turn this property into rental? With lack of any evidence I'd say no loss.

But I would still conclude it be fact and circumstances would dictate.

One could say anything but renting on a month to month basis and up for SALE at the same time is not the intent to rent. Loss not deductible..............

[Jesse]

Here is the IRS answer:

It depends on facts and circumstances.

One might think that there is a regulation for everything, but there is not. ...................
..............as I said up there before, it all depends on facts and circumstances (F&I).

I am in exact agreement with Harlan.

Why couldn't it be possible the true intent was to turn the house into rental property?

Did they have it for sale and rent the home out to cover costs while the house was for sale? Personal property - no loss.

Was the true intent to rent the house but someone unexpectedly made an offer and the taxpayer decided after 5 months of dealing with tenants they jumped at the chance to sell it? If this is the case I think you then need to show the intent. Can you do this beyond any reasonable doubt? What evidence might show true intent was to turn this property into rental? With lack of any evidence I'd say no loss.

But I would still conclude it be fact and circumstances would dictate.

[LCP]

ok, here i am. you are looking to do your best in giving your client a loss on the sale of a principle residence. but a loss is not allowed on a personal residence. you are insisting that because it was a rental for five months it qualifies for the loss. we are not going to change your mind.
i'm sure there is a regulation somewhere that gives a time frame for allowing the use of a home as a rental pending sale, i just can't find it right now and i'm not a search pro, but i do use the tax book. in my own experience i have just taken the depreciation taken and subtracted that from the basis for a new basis, i never had a loss but if i had i would have told the client he can't take the loss. good news was that all were gains and i could tell the client he qualified for the exclusion of gain.

Thanks for your additional comments .... I really wasn't insisting on anything. I was looking for something authoritative........ absent that, yes I am inclined to do what I think is reasonable as long as the client understands the issue.

I did reduce the basis to the FMV and the loss is not that big as a result.

[ChEAr$]

i'm sure there is a regulation somewhere that gives a time frame for allowing the use of a home as a rental pending sale, i just can't find it right now and i'm not a search pro, but i do use the tax book..

One might think that there is a regulation for everything, but there is not. I dont' recall ever seeing any IRS guidance on a minimum time frame for awarding true rental status to a property. We've disucussed this issue over on another board several years ago in fact.

However, I and others would suggest two years as being that minimum time with anything less being temporary rental and therefore other income. Unless taxpayer can prove intent and best efforts in active rental activities for a lesser time period.

as I said up there before, it all depends on facts and circumstances (F&I).

[Gretel]

I am still questioning if you indeed have a loss. You probably know that the basis for the rental is the lower of the "conversion value", which is the FMV on the day of conversion, or the actual basis?

IRS and some courts say that a conversion to a rental to bridge the period before a personal residence is sold is not a true conversion to a rental and losses were disallowed. Another court disagreed with this, so the proof will be the taxpayers if challenged.

I do not think you are in any good position "to take" the loss going out on a limp. It's your client's decisions (or should be) after being educated by you, also being advised that he might have to go to court to have this loss allowed. ..and, no, I do not have the court cases.

[taxmom34]

ok, here i am. you are looking to do your best in giving your client a loss on the sale of a principle residence. but a loss is not allowed on a personal residence. you are insisting that because it was a rental for five months it qualifies for the loss. we are not going to change your mind.
i'm sure there is a regulation somewhere that gives a time frame for allowing the use of a home as a rental pending sale, i just can't find it right now and i'm not a search pro, but i do use the tax book. in my own experience i have just taken the depreciation taken and subtracted that from the basis for a new basis, i never had a loss but if i had i would have told the client he can't take the loss. good news was that all were gains and i could tell the client he qualified for the exclusion of gain.

[LCP]

Please come back TaxMom34 and NY EnrolledAgent ....

You asked me a question suggesting that I was dense and/or an ingrate for not understanding and accepting the perfect answer?

No offense to the answer giver, but I explained why I thought it was less than perfect.

This is not an obscure issue in the real estate market we have and will likely continue to have ..........

[ChEAr$]

You fooled me..... I thought you had referenced a pertinent code section. I guess I don't worry too much about unreasonable positions or I'd have that one memorized.

Well now, this brings up something interesting. Is it unreasonable to have decided to convert a home into a house, rental house that is, do what's necessary to make it so, but then 5 months down the road change your mind due to unforseen circumstances?

It does happen you know.

[LCP]

The perfect answer would have indicated how many months of renting makes it a rental...... or that a personal residense can never be a rental.

....or it might have refered to 6694, which I will go read.

You fooled me..... I thought you had referenced a pertinent code section. I guess I don't worry too much about unreasonable positions or I'd have that one memorized.

[ChEAr$]

Here is the IRS answer:

It depends on facts and circumstances.