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Posted by removeps-groups@yahoo.com on November 1, 2009, 1:42 pm
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> 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
Am still confused. How do we know whether we are figuring basis for
gain or for loss (in order to know which rules to apply)? In the
example of purchasing a house for 1M, converting it to rental when FMV
is 600k, and selling it 3 years later for 750k, with depreciation of
65k over those 3 years, which rules apply?
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