Rental to Personal Residence (2nd home)


V

Vernon Chatman

If rental property (at the beach) is taken out of service
(retiring and want beach home for personal use only), are
there any immediate tax consequences?

If later sell the property, how long must the property have
been held before the prior rental use can be ignored for tax
purposes?
 
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J

John H. Fisher

Vernon Chatman said:
If rental property (at the beach) is taken out of service
(retiring and want beach home for personal use only), are
there any immediate tax consequences?
There would be no immediate tax consequences.
If later sell the property, how long must the property have
been held before the prior rental use can be ignored for tax
purposes?
NEVER!!! Remember, you will have a reduced basis due to
the depreciation you enjoyed over the years.

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
D

Dave Woods, EA

Vernon Chatman said:
If rental property (at the beach) is taken out of service
(retiring and want beach home for personal use only), are
there any immediate tax consequences?
Only that re tax and mortgage interest are now taken on
Schedule A and not E.
If later sell the property, how long must the property have
been held before the prior rental use can be ignored for tax
purposes?
N/A. Prior allowable depreciation is recaptured regardless
of what happens afterwards.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
M

Michael T Wing CPA

Vernon Chatman said:
If later sell the property, how long must the property have
been held before the prior rental use can be ignored for tax
purposes?
The house must generally be owned and used as a primary
residence for 2 out of the last 5 years to qualify for the
personal residence gain exclusion.

But, I am not sure that the prior rental usage can ever be
TOTALLY ignored. The basis of the house must be reduced by
the amount of depreciation allowable during the rental
period (this might be "moot" if the resulting gain is within
the $250,000/$500,000 exclusion range) and the amount of
depreciation allowable after May '97 must be recaptured in
any event (this is NOT moot because such amount is taxable
REGARDLESS of the exclusion).

MTW
 
E

Ed Zollars, CPA

Vernon said:
If rental property (at the beach) is taken out of service
(retiring and want beach home for personal use only), are
there any immediate tax consequences?
Generally, no problem though if there were any property that
were subjected to accelerated depreciation under MACRS that
now has business use "prematurely" fall below 50%, there
could be some forced recapture. If the only depreciable
property would be the buildings (no land improvements, etc.,
being depreciated under more rapid write offs) then there
shouldn't be an issue on conversion.
If later sell the property, how long must the property have
been held before the prior rental use can be ignored for tax
purposes?
If any depreciation was claimed after May 6, 1997, then you
could never *totally* ignore the fact it was a rental. But,
for all other gain, the standard 2 of 5 test would apply, as
would the exceptions for getting a partial exclusion if the
facts fit. At least, I find nothing in the final
regulations that suggests any different result.
 
P

Phil Marti

Vernon Chatman said:
If rental property (at the beach) is taken out of service
(retiring and want beach home for personal use only), are
there any immediate tax consequences?
No.

If later sell the property, how long must the property have
been held before the prior rental use can be ignored for tax
purposes?
Death.

Phil Marti
Topeka, KS
 
B

Bob Oaks

I've done this myself. There are no immediate tax
consequences of converting the house from rental to personal
use (though I think my accountant put a note to that effect
in my next tax return). Eventually selling has a couple of
components, and can't really be "ignored". If you live in
the house for two out of five years as your primary
residence, you can take advantage of the $250,000 ($500,000
if married) capital gains exclusion for any appreciation,
including appreciation while it was a rental. But you
CANNOT avoid paying taxes on any depreciation you claimed
while it was a rental property. I think that rate is still
25%. That has to be recovered and cannot be sheltered by
the capital gains exclusion.
 
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A

Arthur L. Rubin

Bob said:
P.S. if you use this home as a second home (not primary
residence), then when you sell you will also be taxed on all
the appreciation, but at the capital gains rate, not the
recovered depreciation rate.
Afraid not. The (now 25%) section 1250 gain applies to any
sale. Pre-1997 depreciation can be excluded under the
$250K/$500K exemption.
 
D

Dave Woods, EA

I guess length of time is not the relevant issue, however,
is the following true and thus prior rental usage can be
ignored?: If one disposes of residential rental property
placed in service after 1986 (or after July 31, 1986, if the
election to use MACRS was made), you will not have any
depreciation to recapture because you used a straight-line
method.
It's not true because you recapture depreciation regardless
of the method used.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
M

Michael T Wing CPA

Vernon Chatman said:
If one disposes of residential rental property
placed in service after 1986 (or after July 31, 1986, if the
election to use MACRS was made), you will not have any
depreciation to recapture because you used a straight-line
method.
That refers to an older "ordinary income" depreciation
recapture rule. Under current law, as I understand it, ALL
depreciation allowed or allowable on a rental property (to
the extent of gain) is treated as "unrecaptured section 1250
gain" subject to a special tax rate of not more than a 25%.
FWIW, note that the former case deals with a depreciation
RECAPTURE, whereas the latter is a case of UNRECAPTURED
GAIN. <g>

If, however, you convert the rental to personal use and
subsequently qualify it as a personal residence, only
depreciation subsequent to early May, 1997 is subject to the
"unrecaptured" rule. Depreciation prior to that date would
apparently NOT be subject to any ~special~ rules (except,
perhaps, in the unlikely event that some other pre MACRS
recapture rule still applied).

MTW
 
D

D. Stussy

If later sell the property, how long must the property have
It's not true because you recapture depreciation regardless
of the method used.
Not quite. If the property meets the residence rule, then
one only recaptures the post-May 7, 1997 depreciation, and
the amounts before that are ignored.

I have a feeling that Congress really meant this to apply to
home offices, but forgot about personal use of former
business property....
 
D

Dave Woods, EA

If later sell the property, how long must the property have
Not quite. If the property meets the residence rule, then
one only recaptures the post-May 7, 1997 depreciation, and
the amounts before that are ignored.
True but that wasn't the issue being addressed.
I have a feeling that Congress really meant this to apply to
home offices, but forgot about personal use of former
business property....
You mean our elected officials....goofed? Surely you jest.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
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D

D. Stussy

Not quite. If the property meets the residence rule, then
True but that wasn't the issue being addressed.
I thought it was - cf. "I'm not certain prior rental usage
can be totally ignored" - It can be if the rental to
residence conversion is before May 1997!
You mean our elected officials....goofed? Surely you jest.
Oh-oh. Sooner or later, the term "congresscritter" may be
infecting this group! :)
 

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