sale of rental property converted to vacation property

[Roddog]

A client has a property that’s he owned for 20 years and was rented for 8 years up until end of 2016. No end of rental claim before 2017.

The property was not rented in 2017, the client remodeled the home and I believe this would be considered as personnel use. He later sold the property in May 2017.

The mortgage and taxes are being written off on schedule A, no expenses are allowed because of no rental use and the property was not available for rent during this time. The client has another home he’s living in also.

1. Which form 4797 part III or just schedule D home sale to report the sale of the property? I know we have to add back depreciation claimed in both cases. The property was put on market in April.

2. Should I still file an schedule E to show property was not rented in 2017 and end rental terms?

[Burke]

If the TP had another home which was his primary residence, and did not live in nor use the former rental property between the time it was rented and it was sold, (which was in fairly close proximity) then simply "remodeling" it prior to sale would not change its character as rental property. IMO, as to your questions:

(1) Sale goes on Form 4797, part III.
(2) If property had no income nor expenses to deduct, don't file Sche E. IRS will recognize end of rental by the reporting of the sale.

[Roddog]

If the TP had another home which was his primary residence, and did not live in nor use the former rental property between the time it was rented and it was sold, (which was in fairly close proximity) then simply "remodeling" it prior to sale would not change its character as rental property. IMO, as to your questions:

(1) Sale goes on Form 4797, part III.
(2) If property had no income nor expenses to deduct, don't file Sche E. IRS will recognize end of rental by the reporting of the sale.

Thanks Burke,

The client other home is out of state, they may have stayed in home some time checking on remodel.
The other question, should depreciation be recaptured up to date of sale (May 2017) or until end of 2016, considering no schedule E will be filed for 2017? The client would not get a depreciation deduction for 2017.

[Burke]

You will not claim depreciation in 2017 since it was not used as rental property. Depreciation up to the amount of gain would be calculated using the amount claimed or eligible to be claimed on the tax returns through 2016.

[Roddog]

You will not claim depreciation in 2017 since it was not used as rental property. Depreciation up to the amount of gain would be calculated using the amount claimed or eligible to be claimed on the tax returns through 2016.

Thanks Burke,

Also, the cost of the improvements to sell the property should be added to the selling expenses or basis?

[Roddog]

You will not claim depreciation in 2017 since it was not used as rental property. Depreciation up to the amount of gain would be calculated using the amount claimed or eligible to be claimed on the tax returns through 2016.

Thanks Burke,

Also, the cost of the improvements and repairs in 2017 to sell the property should be added to the selling expenses or basis?

[Burke]

Add to basis.

[marlenew]

Passive Losses

Additional qustion on this situation. If taxpayer has carry-over losses on the rental property due to his high income, are these losses simply carried-over until he sells the home after being converted from a rental to a vacation vs lossing the carry-over losses?

[Burke]

Yes. They are used in the calculation of gain/loss at sale. He will have to account for the personal use of the property prior to it being rented.