2nd home used personally and as rental property-loss on sale in 2013

[Kram BergGold]

TC Case

I believe the research mentioned a TC case called Roy. In this case a person rented his home at less than fair market value. The TC said even though less than fair market value each day counted as a rental day.

[mactoolsix]

I had NATP research the vacation home sale. As I suspected, after thinking about it after your inputs, the sale gets reported as the sale of a rental on 4797 and a residence on D. What I learned is even if you rent for 14 days or less during the year and pocket the money (and don't report the rent), these are considered rental days. I saw this in NCPE and thought that 7 days of rental use should not be considered as rental but in 1040 Deskbook by PPC it states they count towards rental days when the property is sold.

Thanks for the final solution posting.

So, for a Personal Use Property rental less than 14 days, you are supposed to track the # of rental days for the purpose of the percentage of rental vs personal.
Did they happen to provide any citations to back up there findings?

Mike

[Kram BergGold]

Answer to MY Issue

I had NATP research the vacation home sale. As I suspected, after thinking about it after your inputs, the sale gets reported as the sale of a rental on 4797 and a residence on D. What I learned is even if you rent for 14 days or less during the year and pocket the money (and don't report the rent), these are considered rental days. I saw this in NCPE and thought that 7 days of rental use should not be considered as rental but in 1040 Deskbook by PPC it states they count towards rental days when the property is sold.

[Kram BergGold]

Amounts

House cost $1,000,000.
Improvements 15,000
Sold for 1,015,000
depreciation 30,000
sales ex $46,000

So if sold as one sale on D there is a $6,000 non deductible loss

If 40% sold on 4797 then there is a $11,600 gain (30 k depreciation less 40% of 46k)
and on Schedule D there is a non deductible loss.

[mactoolsix]

I now have a situation where over 9 years a vacation home was about 60% personal use and 40% rental each year (the percentages varied by a few % each year). In this case it would be better tax wise if I could report the sale as one asset on Schedule D, as you would a home office. This way the loss would offset the depreciation claimed and they would report zero gain or loss. However, I think I have to report this as a sale (the 40%) with a gain on Form 4797 (due to depreciation) and a sale (60%) with no gain or loss on Schedule D as the loss is not allowed. Anyone disagree?

Kram - can you provide some ballpark numbers for this . . .

Mike

[Kram BergGold]

Memory Lane

Years ago when you sold a principal residence with a home office you had two sales. Office on 4797 and home on 2119 or Schedule D. Then IRS said no you can just do on Schedule D. As I too, can not find anything on point to guide me in this situation my thinking is this is a two form sale because there is no special rule like in the home office situation.

[appelman]

Hmmm.

Well, it's true that the whole Pub. is devoted to the sale of a main home, but I would think that would only be relevant to the question of gain exclusion. I can't seem to find anything anywhere that specifically addresses the question of a second home used partly as a rental. Can you? The only thing i've come up with is an H & R Block article that implies allocation to be required, but without any citation.

http://www.hrblock.com/free-tax-tips...d=64640&out=vm

I saw page 16 in Pub 523. When I read it I interpreted it to say that the treatment as one item on Schedule D applies to a principal residence but not a second home.

[Kram BergGold]

Response to Evan

I saw page 16 in Pub 523. When I read it I interpreted it to say that the treatment as one item on Schedule D applies to a principal residence but not a second home.

[appelman]

I'm not so sure.

The treatment you suggest might apply if the rental was for a separate living unit. But if we are dealing with 40% rental of the whole property, might it not be treated like a home office? See "Property Used Partly for Business or Rental" on p. 16 of Pub. 523. I'm not sure, but it might bear thinking about.

The NCPE situation was slightly different, which it seems makes all the difference in the world. In their example, the property was rental in year one with only 10 days of personal use. The next three years it had rental but with so much personal use the deductions were limited. So there was no real conversion, there was always a mix of personal and rental. So they treated this as two sales, one on 4797 with a loss and one on Schedule D with no gain or loss.
I now have a situation where over 9 years a vacation home was about 60% personal use and 40% rental each year (the percentages varied by a few % each year). In this case it would be better tax wise if I could report the sale as one asset on Schedule D, as you would a home office. This way the loss would offset the depreciation claimed and they would report zero gain or loss. However, I think I have to report this as a sale (the 40%) with a gain on Form 4797 (due to depreciation) and a sale (60%) with no gain or loss on Schedule D as the loss is not allowed. Anyone disagree?

[Kram BergGold]

I See a Slight Difference

The NCPE situation was slightly different, which it seems makes all the difference in the world. In their example, the property was rental in year one with only 10 days of personal use. The next three years it had rental but with so much personal use the deductions were limited. So there was no real conversion, there was always a mix of personal and rental. So they treated this as two sales, one on 4797 with a loss and one on Schedule D with no gain or loss.
I now have a situation where over 9 years a vacation home was about 60% personal use and 40% rental each year (the percentages varied by a few % each year). In this case it would be better tax wise if I could report the sale as one asset on Schedule D, as you would a home office. This way the loss would offset the depreciation claimed and they would report zero gain or loss. However, I think I have to report this as a sale (the 40%) with a gain on Form 4797 (due to depreciation) and a sale (60%) with no gain or loss on Schedule D as the loss is not allowed. Anyone disagree?

[mactoolsix]

But what is NCPE?

National Center for Professional Education

http://www.ncpeseminars.com/index.html

[appelman]

Excuse my ignorance.

But what is NCPE?

[mactoolsix]

NCPE says you figure the deductible loss this way. Add up all days of personal use. Add up all days of rental use. Then divide rental days by the total use days to get a %. Multiply this percent times the sales price and the basis and subtract. Then reduce this loss by the depreciation actually claimed. This is the deductible loss. This is on page 17-19 of the 2013 Individual Seminar book. Earlier I was one of those who said loss is not deductible but according to NCPE we were wrong.

Kram - Does NCPE provide any citation or court case references? I have done several searches to try to substantiate this calculation of a deductible loss on rental property converted to a personal residence and then sold, but have not found anything. I think they may have been referring to a personal residence converted to a rental?

From U.S. Master Tax Guide (2013),1626.Basis of Residential or Converted Property

If rental property is converted to a personal residence, adjustments to basis for depreciation end on the date of the conversion. Any gain on the sale of the property will be recognized (subject to the exclusion rules at ¶1705) and may be subject to depreciation recapture ( ¶1779). Loss will not be recognized.

I tend to think your your first posting on this was correct.

Mike

[Kram BergGold]

NCPE's Take on your situation

NCPE says you figure the deductible loss this way. Add up all days of personal use. Add up all days of rental use. Then divide rental days by the total use days to get a %. Multiply this percent times the sales price and the basis and subtract. Then reduce this loss by the depreciation actually claimed. This is the deductible loss. This is on page 17-19 of the 2013 Individual Seminar book. Earlier I was one of those who said loss is not deductible but according to NCPE we were wrong.

[JON]

I am bad

I was using the opposite. sorry...