Rental Home Converted to Personal Use, Then Sold

[JohnH]

Taxpayers owned a beach property which was 100% rental from 1990 - 2005. Depreciation was taken in all years allowable, along with other normal rental property expenses against rental income. There were no suspended losses for these years.

They became tired of being landlords, so In 2005 it was converted to a 2nd home. From 2005 forward it served as a 2nd home for vacations & getaways, with only tax deducitons being mortgage interest and property taxes (no rental income, no Schedule E).

They sold it at a profit in 2011. So can they just report the sale on Schedule D, reducing the cost basis by the depreciaiton claimed from 1990-2005, or does the prior rental status require any sort of special allocation and reporting?

[JG EA]

I agree with how you are doing it. If they had moved in to the home for that amount of time you'd not do anything special for the rental years (except what you've done). So, making it a second home would be also fine. It is nice it is so long in my opinion - no question.

[JohnH]

Thanks JG. I keep looking at the 4797 out of the corner of my eye and saying to myself "no", "yes", "maybe", "maybe not".

[ChEAr$]

It sounds to me like 4797 should be used, so that the recapture
gain and the otherwise capital gains portions will be properly shunted by the software.

Then to double check, compare with putting it all on schedule d to see.

[joanmcq]

If it was a personal home converted to rental, it would go on the 4797. If it's the other way around, it goes to Sch D (unless they've changed things in the last two years with the new conversion rules).

[Kram BergGold]

Schedule D and unrecaptured 1250

I would use Schedule D. remember you have unrecaptured 1250 gain to deal with.

[ChEAr$]

I would use Schedule D. remember you have unrecaptured 1250 gain to deal with.

That's what I had in mind of course. But I can see that since it's not business type property at the time of sale, form 4797 might not apply even though 1250 would have to be dealt with anyway.

So, let's say total gain of 75,000, 30,000 of it unrecaptured 1250 gain. What goes where?

[OtisMozzetti]

...
But I can see that since it's not business type property at the time of sale, form 4797 might not apply even though 1250 would have to be dealt with anyway.

So, let's say total gain of 75,000, 30,000 of it unrecaptured 1250 gain. What goes where?
...

I'm not sure whether there is any provision that requires part of the gain, up to the amount of depreciation, to be recaptured as ordinary income; and part of the gain to be treated as unrecaptured 1250 gain maximum 28% rate; and part of the gain (if there was any!) from the long 2005-2011 period of 2nd home use to be treated as long-term capital gain.

If the FMV at the date of conversion does make any difference, I would suspect that the property went up in value despite the use by tenants during the time 1990-2005 and that the property lost value overall during the difficult real estate market period 2005-2011.

EA in Calif.

[JohnH]

There is gain. The sellers were very fortunate in this market.

Original basis of $160K, reduced to $130K by $30K of depreciation, then sold for $550K minus $40K of fixing up and selling expenses. (Numbers are rounded, of course)

Thanks for all the fine input - I really appreciate the help in thinking this through.