Primary to Rental; Loss

[DaveinTexas]

A client purchased a home in 2005. Moved out 12/10/2006 to his primary home and converted the old home to a rental property placed into service 01/01/2007.

Original purchase price was $105,000. Improvements made to the home that increased value totaled $15,000. Total basis is $120,000. FMV as of 01/01/2007 was around $125,000.

He rents the home for most of 2007 and sells the property in December 2007 for $107,000 plus closing costs of $7,000

Cost plus improvements plus closing costs on sale = $105,000 + 15,000 + 7,000 = $127,000
Sold for $107,000.

Loss of $20,000 on the 4797. Is this loss fully deductible like I think it is? Or am I going crazy?

TIA

[Roland Slugg]

Concur

Well, I don't know if you're going crazy, but I can comment on your analysis of the rental matter. Your summary was quite correct. If the property's FMV on 1/1/07 had been less than $120k, the loss would be lower by an equal amount. Since it was higher than the property's basis, however, it doesn't figure into the loss. Nevertheless, it might help to have some sort of documentation of that $125k FMV in case the IRS ever raises the issue.

Report the loss on F-4979, Part II. Since the property was placed in service and sold in the same year, don't take any depreciation.

[DaveinTexas]

Thanks Roland

I appreciate the response. I did tell the client to get together his appraisal prior to the sale and all of his improvement documentation in case his return is questioned. I made sure that no depreciation was taken.

Thanks again Roland.

[Davc]

Your client also needs to be warned that the loss could be disallowed under the principle that it was a temporary rental while attempting to sell. TP needs to be ready to prove original intent and show what changed to cause the sale.

[DaveinTexas]

Reason to sell

Your client also needs to be warned that the loss could be disallowed under the principle that it was a temporary rental while attempting to sell. TP needs to be ready to prove original intent and show what changed to cause the sale.

I imagine the reason to sell is a depressed real estate market and the fact that his rental was operating at a loss while charging a fair market value rent.

I didn't know that the loss could be disallowed; do you know of any cites/references that you lead me to?