Gain/Loss on rental property


H

Hank Youngerman

Just checking here...

I purchased a condo for about $180,000 five years ago. Lived in it for a year and a half, then converted it to a rental. Did not live in it for two years. Current market value <sigh> about $100,000.

Are these true:

a) If I sell at a loss (meaning purchase price minus depreciation taken minus sale price) that is a capital loss.
b) Let's say that 10 years from now I move back into the condo, by which time market value exceeds cost less depreciation, and live in it for at least two years as my primary residence. At that point, any gain on sale would be treated as gain on sale of a primary residence and not taxable up to $500,000 (subject to restriction of how often I can take that exclusion).
c) If handled properly, I could do a tax-free exchange of the property for another rental property. If I then used that new property as a rental for a period of time, then moved into it and used it as my primary residence for two years, I would get the same treatment as in (b).
 
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R

removeps-groups

I purchased a condo for about $180,000 five years ago. Lived in it for a
year and a half, then converted it to a rental. Did not live in it for two
years. Current market value <sigh> about $100,000.
Based on my recent post, it is good to get an appraisal of what the property was worth at the time the rental started (ie. when it was available for rent). Because the property tax bill might claim the property was 180k, 170k, 200k, or some high number, but an appraisal will say it is worth only 130k. This is important because with a higher appraisal you get a larger loss when you sell, thus in effect converting a personal loss (which is not deductible) into a business loss (which is deductible). So it's possible the IRS will challenge the fact that the property really was worth 180k when you started the rental.
Are these true:

a) If I sell at a loss (meaning purchase price minus depreciation taken minus sale price) that is a capital loss.
No, it is a business loss. It is allowed in full -- no 3k limit. Also, if your AGI is reduced to below zero, you get a NOL (net operating loss) which you can carryback or carryforward.

Also, the profit is more accurately purchase price + improvements - energy credits - depreciation - sale price - losses on 8582. A few things like title fees, transfer taxes add to basis as well, but I'm not clear on which ones.

b) Let's say that 10 years from now I move back into the condo, by which time
market value exceeds cost less depreciation, and live in it for at least two
years as my primary residence. At that point, any gain on sale would be
treated as gain on sale of a primary residence and not taxable up to $500,000
(subject to restriction of how often I can take that exclusion).
You only get 500k if you are married at the time you sell. They might have an exception that if you sell the house in the year one spouse dies you still get the full 500k, and if you are divorced then you still get the 500k -- but I'm not sure on how these work. Also, if the property is condemned before two years are up, you still get the exemption.

More importantly, because you convert a rental into personal, the 250k/500k exemption is reduced by a ratio involving the number of years it was personal, the number of years it was rental. I think the formula is like this: if personal for 4 years, rental for 10 years, then the exemption is reduced to 4/14 of the maximum value. Non-qualified use also includes times that it was a second or third home.

Also, the amount of gain during to depreciation is not allowed under the 500k exemption. That is, you have to recapture the depreciation because you got a tax break for it in prior years -- but if you were not able to deduct the loss because the AGI was over 100k to 150k, then you get to take the carryforward loss reported on 8585 when you sell, thus potentially eliminating the depreciation.

And who knows if section 121 will still be around 10 years from now.

c) If handled properly, I could do a tax-free exchange of the property for
another rental property. If I then used that new property as a rental for a
period of time, then moved into it and used it as my primary residence for
two years, I would get the same treatment as in (b).
I'm not sure about tax-free exchange of property. Section 1031 only lets you defer paying taxes.
 
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I

ira smilovitz

[middle snipped]

I'm not sure about tax-free exchange of property. Section 1031 only lets you defer paying taxes.
Real property converted to personal use after a 1031 exchange has a 5-year waiting period before Section 121 exclusion can be claimed. I don't know if there is any provision for prorating the exclusion for sales within 5 years.

Ira Smilovitz
 

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