rental property sale and passive losses


W

Will Trice

I may owe an apology for asking this question because a
search on Google indicates that some version of this
question has been asked (and answered) numnerous times in
the past. But none had the same details as I have, so here
goes.

In 2004 I converted a townhouse I had been living in into a
rental property. I intend to sell it when the lease expires
this year. To put round numbers on things, I will sell the
property for a $15000 gain over my purchase price which I
can exclude because when I sell I'll have lived in the
property for 2 of the previous 5 years. But I still have an
additional $6000 gain due to the recapture of depreciation
that I have to deal with.

At the time of sale I expect to have accumulated $6000 in
passive loss carry-forward that I have been unable to deduct
due to my AGI in 2004. My question: can I use the $6000
passive loss to offset the $6000 capital gain? Looking at
the tax forms and publications, it appears that I'm hosed
and that I can only use the $6000 passive loss to increase
the basis of my property, which still leaves me with the
$6000 recapture of depreciation.

On the assumption that I'm hosed, I should be able to reduce
the amount of recapture due to the fact that some of the
depreciation was not deductible because I couldn't claim the
passive losses (which includes depreciation). About 1/3 of
my passive losses are depreciation, so would I reduce the
recapture to $4000? Or can I say that all of the disallowed
passive loss was from the $6000 depreciation and avoid
paying capital gains altogether (wishful thinking)?

Thoughts and references would be appreciated,
-Will
 
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T

Thomas Healy

Will Trice said:
I may owe an apology for asking this question because a
search on Google indicates that some version of this
question has been asked (and answered) numnerous times in
the past. But none had the same details as I have, so here
goes.

In 2004 I converted a townhouse I had been living in into a
rental property. I intend to sell it when the lease expires
this year. To put round numbers on things, I will sell the
property for a $15000 gain over my purchase price which I
can exclude because when I sell I'll have lived in the
property for 2 of the previous 5 years. But I still have an
additional $6000 gain due to the recapture of depreciation
that I have to deal with.

At the time of sale I expect to have accumulated $6000 in
passive loss carry-forward that I have been unable to deduct
due to my AGI in 2004. My question: can I use the $6000
passive loss to offset the $6000 capital gain? Looking at
the tax forms and publications, it appears that I'm hosed
and that I can only use the $6000 passive loss to increase
the basis of my property, which still leaves me with the
$6000 recapture of depreciation.

On the assumption that I'm hosed, I should be able to reduce
the amount of recapture due to the fact that some of the
depreciation was not deductible because I couldn't claim the
passive losses (which includes depreciation). About 1/3 of
my passive losses are depreciation, so would I reduce the
recapture to $4000? Or can I say that all of the disallowed
passive loss was from the $6000 depreciation and avoid
paying capital gains altogether (wishful thinking)?

Thoughts and references would be appreciated,
Thoughts are free; references take some grease.

Actually, the $6,000 in passive losses are claimed on
Schedule E. You end up having $6,000 of 25% gain against
$6,000 ordinary loss. If you are in at least the 25%
bracket, it's a good deal.
 
W

Will Trice

Thomas said:
Actually, the $6,000 in passive losses are claimed on
Schedule E. You end up having $6,000 of 25% gain against
$6,000 ordinary loss. If you are in at least the 25%
bracket, it's a good deal.
The problem is that I don't expect to be able to take the
$6000 passive loss on Schedule E because of my AGI. I'm
looking for another way to recover it. The thing is, I'll
have at least $6000 of depreciation on Schedule E that I
never got to actually deduct due to the Schedule E AGI
limitations. Yet when I sell, I have to pay capital gains
on that depreciation. If I understand things correctly...

Thanks for your help,
-Will
 
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W

Will Trice

Thomas said:
Actually, the $6,000 in passive losses are claimed on
Schedule E. You end up having $6,000 of 25% gain against
$6,000 ordinary loss. If you are in at least the 25%
bracket, it's a good deal.
Ok, I did another search and this time I turned up a post
that I think sheds more light for me on your response above.
When I completely dispose of an interest in a passive
activity, then all losses are allowable regardless of AGI,
right? And even if they were limited, I can at least offset
the capital gain because it's considered passive activity
income, right?

Thanks again, I was just a little slow understanding your post.
-Will
 

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