Selling real estate at a loss.

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Subject Author Date Selling real estate at a loss. NadCixelsyd 10-27-2009  Re: Selling real estate at a loss. Arthur Kamlet 10-27-2009  Re: Selling real estate at a loss. removeps-groups@yahoo.com 10-27-2009  Re: Selling real estate at a loss. Wallace 10-29-2009  Re: Selling real estate at a loss. Phil Marti 10-30-2009  Re: Selling real estate at a loss. Wallace 10-30-2009  Re: Selling real estate at a loss. Bill Brown 10-30-2009  Re: Selling real estate at a loss. Stuart A. Bronstein 10-30-2009  Re: Selling real estate at a loss. Mark Bole 10-31-2009  Re: Selling real estate at a loss. Stuart A. Bronstein 10-31-2009  Re: Selling real estate at a loss. removeps-groups@yahoo.com 11-01-2009  Re: Selling real estate at a loss. Bill Brown 11-01-2009  Re: Selling real estate at a loss. Mark Bole 11-01-2009  Re: Selling real estate at a loss. Mark Bole 10-31-2009  Re: Selling real estate at a loss. Wallace 10-31-2009
Posted by Wallace on October 30, 2009, 10:50 am Please log in for more thread options > On Oct 29, 4:26 pm, "Wallace" wrote: > >> > The gain/loss on sale of house will be based upon the depreciable >> > basis, which is the lower of cost or FMV. So if she purchased for 1M, >> > and it was worth 600k when she started renting it, and she sells it >> > for 750k 3 years later, she has a gain of 150k plus the recaptured >> > depreciation (about 600k/27.5=21.81k per year, or 65.45k over 3 >> > years), so we're looking at 25% of 215.45k or 53.86k in tax. >> >> Is this correct? At first blush it seems so wrong. At second blush, it >> seems it might be right. > > I would have worded it differently, but yes, it's right. When > property has been converted from personal use to rental the starting > point for depreciation is the lesser of adjusted basis or FMV at the > time of conversion. That makes it also the starting point for > determining the gain/loss upon ultimate sale of the property. > >> In either event, if you found yourself in this situation, what could you >> do >> to reduce your tax exposure on a property you have a loss on? Convert >> back >> to your personal residence? > > When our story began it was her personal residence and she was trying > to figure out a way to make tax use of a loss. If we're still at that > point, there is no tax exposure. If she does convert it to a rental > there will always be a recapture of depreciation when the property is > sold, even if she converts it back to a personal residence. The way > around it is to die without ever selling the property, in which case > the heirs get it with a basis equal to FMV and all that other stuff > goes to her grave with her. If she converts to rental and then converts back to residential, can she use her original cost as the basis, subject to depreciation recapture? -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Bill Brown on October 30, 2009, 11:14 am Please log in for more thread options > If she does convert it to a rental there will always be a > recapture of depreciation when the property is sold, even if > she converts it back to a personal residence.   Always is such a powerful word. She would have to sell it at a gain to recapture any depreciation. Regards, Bill -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Stuart A. Bronstein on October 30, 2009, 12:23 pm Please log in for more thread options > >> If she does convert it to a rental there will always be a >> recapture of depreciation when the property is sold, even if >> she converts it back to a personal residence.   > > Always is such a powerful word. She would have to sell it at a > gain to recapture any depreciation. Sure. But the issue is what does "gain" mean in this context? If she originally purchased it for $1 million, converted it to rental when it's worth $600,000 and then sells it when it goes back up to $750,000, she has to recapture depreciation, of course. But is there an additional $150,000 taxable income? I find that hard to believe. -- Stu http://downtoearthlawyer.com -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Mark Bole on October 31, 2009, 8:58 am Please log in for more thread options Stuart A. Bronstein wrote: >> >>> If she does convert it to a rental there will always be a >>> recapture of depreciation when the property is sold, even if >>> she converts it back to a personal residence. >> Always is such a powerful word. She would have to sell it at a >> gain to recapture any depreciation. > > Sure. But the issue is what does "gain" mean in this context? If > she originally purchased it for $1 million, converted it to rental > when it's worth $600,000 and then sells it when it goes back up to > $750,000, she has to recapture depreciation, of course. But is there > an additional $150,000 taxable income? > > I find that hard to believe. > Pub 551 addresses this exact issue. I seem to recall having cut and pasted these paragraphs here before in some other long-forgotten thread, it's a topic that comes up every so often, I guess. It's one of those counter-intuitive situations where your basis depends on whether you are figuring gain or loss. In some corners of the tax law, it is possible to dispose of property and have neither a gain nor a loss (and I don't mean just zero). I mean when you use the basis for purposes of figuring a gain, it yields a loss; when you use the basis for purposes of figuring a loss, it yields a gain. From Pub 551: "Sale of property. If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. "Gain. The basis for figuring a gain is your adjusted basis when you sell the property. [example snipped] "Loss. Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. [example snipped]" Also I don't remember if it was mentioned earlier, but if the rental has unused passive loss carryovers, they don't get used when converting back to personal use, but rather when the property is finally disposed of. If all the gain can be excluded due to Sec. 121 (less likely now under new rules regarding periods of qualifying use), then the unused passive loss disappears. -Mark Bole -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Stuart A. Bronstein on October 31, 2009, 9:53 am Please log in for more thread options > Stuart A. Bronstein wrote: >> >> Sure. But the issue is what does "gain" mean in this context? >> If she originally purchased it for $1 million, converted it to >> rental when it's worth $600,000 and then sells it when it goes >> back up to $750,000, she has to recapture depreciation, of >> course. But is there an additional $150,000 taxable income? >> >> I find that hard to believe. > > Pub 551 addresses this exact issue. [snip] Thanks, Mark. That's an excellent explanaion, and makes total and perfect sense (well, at least as much as the tax code ever makes any sense). -- Stu http://downtoearthlawyer.com -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted Real Estate Developer May 25, 2007, 1:41 pm Re: Real Estate Developer May 31, 2007, 12:58 am NJ Real Estate Tax Rebate November 22, 2007, 12:25 pm Real Estate Sales Tax January 20, 2008, 1:14 am llc real estate questions January 21, 2008, 7:07 pm Real Estate Developer LLC March 28, 2008, 10:39 pm Real Estate Tax Odd Situation January 1, 2010, 10:55 am Foreign Real Estate March 15, 2010, 1:15 pm Real estate and end of year tax planning. 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