Personal Residence became rental property and then sold 2.5 years later

[duanecpa]

Condo was purchased in 2003 with the improvements having a cost of $140,000.

Condo was converted to a rental unit 1/1/13 with the cost of the improvements ($140,000) depreciated straight line over 27.5 years. The owner of the property since 2003 had lived in the condo as the primary residence for 2 of the past 5 years.

Property was sold in 2015.

Since the value of the property has declined since 2003 the 2015 FMV is about 1/2 of the original cost resulting in a large business loss.

is this loss 100% of a business loss?

Or, are there other allocations that need to be made since the majority of the time the property was held was for personal use.

Citations please.

Thank you.

[TaxGuyBill]

The depreciable basis should have been the LOWER of (1) cost basis ($140,000) and (2) the Fair Market Value when converted to a Rental Property.

If the sale price was less than that (after reducing basis for depreciation), you have a loss.
The sale price was for less than $140,000, so you don't have a gain.
If the sale price is between those numbers, you don't have a gain or a loss.


If I'm reading your post correctly (I may be wrong), the depreciation should have been using the Fair Market Value at date of rental conversion, not $140,000. You would also use that number to determine if you have a loss or not (after reducing basis for depreciation).

https://www.irs.gov/publications/p551/ar02.html#en_US_201412_publink1000257022

Does that help at all?

[duanecpa]

Yes - this is a new client to me - makes common sense - thank you.

Duane

[taxea]

The depreciable basis should have been the LOWER of (1) cost basis ($140,000) and (2) the Fair Market Value when converted to a Rental Property.

If the sale price was less than that (after reducing basis for depreciation), you have a loss.
The sale price was for less than $140,000, so you don't have a gain.
If the sale price is between those numbers, you don't have a gain or a loss.


If I'm reading your post correctly (I may be wrong), the depreciation should have been using the Fair Market Value at date of rental conversion, not $140,000. You would also use that number to determine if you have a loss or not (after reducing basis for depreciation).

https://www.irs.gov/publications/p551/ar02.html#en_US_201412_publink1000257022

Does that help at all?

the rental basis should be the Lower of FMV or the adjusted basis, not the cost basis and minus the land cost vs FMV. You get to include improvements made prior to rental conversion.

[nwtaxlady]

loss deductible? maybe not?

I understand how you figure the cost basis, I agree with that. I am looking at it as a Personal Residence and the look back period at time of sale back 5 years, yes owned and occupied 2 out of the last 5 years. Also consider that it was a personal residence majority of the time. And as a Personal Residence you can't take a loss and there would be NO depreciation recapture due to the loss. Think of those people same time frame of owning it and living in it and decide to buy another house and rent this one out unitil it sells. I believe in those cases that had a gain they only recaptured the depreciation up to the gain. No other gain reported due to the 2 out of 5 year rule if they sold it in time. Take that same scenario but have loss, you can't take a loss on a personal residence.

Once you look at it from this perspective, is the loss deductible? Just a thought?

[TaxGuyBill]

I understand how you figure the cost basis, I agree with that. I am looking at it as a Personal Residence and the look back period at time of sale back 5 years, yes owned and occupied 2 out of the last 5 years. Also consider that it was a personal residence majority of the time. And as a Personal Residence you can't take a loss and there would be NO depreciation recapture due to the loss. Think of those people same time frame of owning it and living in it and decide to buy another house and rent this one out unitil it sells. I believe in those cases that had a gain they only recaptured the depreciation up to the gain. No other gain reported due to the 2 out of 5 year rule if they sold it in time. Take that same scenario but have loss, you can't take a loss on a personal residence.

Once you look at it from this perspective, is the loss deductible? Just a thought?

That is why the basis for a loss is the lower of (1) cost basis and (2) FMV when converted to a rental. That way, the change of price (gain/loss) is based on ONLY the time it was a rental.

[nwtaxlady]

Thanks taxguybill.

Ok that makes sense. So you use the FMV figure when set up on depreciation for the cost basis at the time of sale, not the actual amount paid for the property? Then that makes more sense to me.
Thank you.

[TaxGuyBill]

If it is sold at a loss, yes, you use the lower of (1) FMV when converted to rental or (2) the actual cost basis. That is also the depreciable basis.

Example:

Purchase price = $150,000
FMV at conversion = $100,000 (this should be the amount to depreciate)
Depreciation taken = $10,000

If the property is sold for $160,000, you have a $20,000 gain ($10,000 due to depreciation).

If the property is sold for $80,000, you have a $10,000 deductible loss.

If the property is sold for $90,000-$140,000, there is neither a gain nor a deductible loss.