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

[Dale Watkins]

A couples out of state 2nd home was used personally and as rental property from 2005 to 2011. It was only a 2nd home in 2012 and 2013, when it was sold at a loss of 45K. How much of that can be taken as a long term capital loss? Any?

[ATSMAN]

How was the loss calculated since it was a rental for a # of years.

[JON]

I think,

but be careful = if it was solely a rental at fair market value for 2 years you can get the loss. Now it is a gray area, but if the conversion was legitimate and not done knowing of the loss(?) and only for that reason, maybe your there. The gray is all over this issue, but I have heard it before if the change in property use is good you get it. Now if it was up for sale for the majority of the time it was held for rental-that could hurt. GRAY

[Kram BergGold]

I say no loss

I have dealt with the situation where someone converts a residence to rental. In this case you make two calculations. For loss you compare sales price to FMV at time of conversion. For gain you compare sales price to cost plus improvements. To deduct a loss you have to have a loss in the first calculation and no gain in the second calculation. However, when you take a rental and convert to personal use I think you are selling a non business asset and the loss is not allowed.

[appelman]

I agree with Kram.

I have dealt with the situation where someone converts a residence to rental. In this case you make two calculations. For loss you compare sales price to FMV at time of conversion. For gain you compare sales price to cost plus improvements. To deduct a loss you have to have a loss in the first calculation and no gain in the second calculation. However, when you take a rental and convert to personal use I think you are selling a non business asset and the loss is not allowed.

Once it's a residence, it's treated as a residence unless and until its status changes again.

[JON]

I am

missing something?? It is converted to a rental.. When it is converted the basis HAS to be adjusted to the lower of COST or FMV then. If you have a loss on the sale then you take it. If you were not getting a fair market value rent on it-it may be thrown out as a good conversion. IRS always has "step transaction" to throw it out, but if it passes on the conversion and you have a loss take it. It would only be the decrease in value for the two years.

I think the toughest problem is how long to hol as a rental. The unkown, but two years seems fine.

[appelman]

Unless I misunderstand the post...

The property was a 2nd home in 2011 and 2012. I.e. it was no longer a rental when it was sold. It would appear that it was converted FROM a rental to a 2nd home.

missing something?? It is converted to a rental.. When it is converted the basis HAS to be adjusted to the lower of COST or FMV then. If you have a loss on the sale then you take it. If you were not getting a fair market value rent on it-it may be thrown out as a good conversion. IRS always has "step transaction" to throw it out, but if it passes on the conversion and you have a loss take it. It would only be the decrease in value for the two years.

I think the toughest problem is how long to hol as a rental. The unkown, but two years seems fine.

[JON]

I am bad

I was using the opposite. sorry...

[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.

[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

[appelman]

Excuse my ignorance.

But what is NCPE?

[mactoolsix]

But what is NCPE?

National Center for Professional Education

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

[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?

[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]

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.