Not thinking clearly - need help...

[rkhan71]

I realize that everyone is "hammering" away at tax returns, but if you have a few moments of time to convey thoughts about the following:

Client (MFJ) converted his former primary residence to a rental, which he had lived in from 2004 to 10/12/12. He established it as a rental on 10/15/12. It was in rental mode with tenants up until December 31, 2014. From Jan 1, 2015 to its sale date of July 22, 2015, it was not rented. He had intended it be a rental for the most part, but found it very difficult to keep up with it (costs and all as rental). So, he sold it for a loss on that date (July 22, 2015). His 5 year circumstance (5 year period coverage): he resided in it from July 22, 2011 (unless we start with July, 22 2010 as full 5 year period) to the rental date of Oct 15, 2012, and then did not live in it until sold. So his active living time seems to be 419 days (approximate days for 2 year period) of the 5 year period ending with the date of sale.

My main question / consideration whether this should be a personal circumstance, no loss; or, could it be treated as business rental (capital asset / Form 4797 - Sale of Business Property), with a loss value of approximately $98.5K? How would one treat this property for sure for loss given the circumstance, or what will fly as normal tax situation? I just want to do the most conservative (right) thing that make tax law sense. At this juncture (late tax season), difficult thinking time; need a second opinion.

Thanks in advance for contributions.

[TaxGuyBill]

I would put it on 4797, and be eligible for a loss.

However, do you really have a deductible loss? The basis for the loss is the LOWER of (1) cost basis, and (2) Fair Market Value on date of conversion to a rental property (plus cost of any improvements after the rental conversion). Then you also subtract depreciation. I wouldn't think the FMV of the home would drop that much in the last 2.5 years.

[rkhan71]

Yes there is

TaxGuyBill:

It was purchased in 2004 at the height of the market; and sold netting costs for loss last year. Basis around $405K (give or take a few thousand), and sold for $333K (not including expenses of sale). However, let me know if I am missing something though. Depreciation was considered - around $14.5K, and will be considered for applicable sale. I just wanted to be sure that I could use the business asset sale idea, or a personal loss situation is more appropriate.

Thanks.

[TaxGuyBill]

As I said, the basis for the loss is the LOWER of (1) cost basis, and (2) Fair Market Value on date of conversion to a rental property (plus cost of any improvements after the rental conversion).

What was the Fair Market Value on 10/15/12? If that FMV is less than the purchase price, you use the FMV in 2012, NOT the purchase price.

[rkhan71]

Okay...thanks

I will check it out. Thanks.

[rkhan71]

So...

TaxGuyBill,

I guess I will just refer to you as Bill. :-}

So, revisiting shows that on the date of conversion the value was $238,745. A definite drop from purchase price, but a definite gain against the sale price in July of 2015. So with your suggestion, I have to / will use the "lower of" value which is the $239K figure for basis. I will also adjust by any cost of selling etc. of course. There weren't any real improvements to speak of; just some small repairs for getting it ready for sale.

Thanks, Bill

PS: Let me know if I should be considering anything else? I really appreciate your help with triggering the basis (clarity) situation. That is why I needed a second opinion.

[TaxGuyBill]

In that case, you don't have a gain OR a loss.

That is the basis for a LOSS, but the basis for a GAIN is still the original purchase price (plus improvements, minus depreciation). So this is in "no man's land" which has neither a gain or loss.

To report it, you need to 'make up' a fake basis. Enter the actual Selling Price and depreciation (I would ignore selling expenses in this scenario). For the basis, enter (1) Selling Price PLUS (2) depreciation. That way it will force Form 4797 to report a $0 gain/loss.

So the 'fake' basis that you enter will be roughly $347,500 (selling price of $333,000 PLUS roughly $14,500 of depreciation). Then enter the actual selling price ($333,000) and depreciation ($14,500).

[rkhan71]

A little confusing but

Thanks, Bill, I just want it to make tax logic sense for the IRS. So I want to use a basis that is most practical for this scenario. I will perform the calculations on the 4797 in see what happens. I just do not want to err in reporting. -:}

Regards,