Hello:

I bought a home in Boston in early 2010 and lived in it until the end of 2011 when I relocated and rented it for a year. The lease ended at the end of 2012, when I put it on the market and sold it on March 15, 2013.

I have the following questions:

(1) how do I treat the period between the end of the lease on December 31, 2012 (when it ceased to be used as a rental property) and March 15, 2013 when the sale was closed? Should I (a) treat the property as an investment property until the date of sale and complete a Schedule E for the 2 and a half month period at the start of 2013, or (b) treat the property as changing back to a non rental property on January 1, 2013 and deduct the mortgage interest, etc on Schedule A for 2013 (since the property was unoccupied for that period and not available for lease)?

(2) In completing form 4562 for 2012, I used an estimated figure for the FMV of the building itself (and not the land) as the basis of depreciation. This is based on the guidance given in publication 946, which states that land should not be treated as a depreciable asset. Is this the correct approach?

(3) In calculating the capital gain/loss on the property during the time it was used for rental purposes, is it correct to use a cost basis of the building plus land instead of just the building? This would (obviously) be different than the basis used for depreciation purposes.

(4) Which IRS form should I use to calculate and report the gain on the property during its use as a rental property?

Thanks in advance,

mvt926

1) b is correct as it ceased , in service no more, to be uses as a rental pty.

(2) You must depreciate rental property since the depreciation is subject to recapture at sale time even if you don't take it while you hold the property for rental. To determine the basis you need several pieces of data: 1. Your original basis in the property. 2. The dollar amount of any improvements made while you occupied it as your residence. 3. The fair market value of the property when you converted it to rental use. 4. The value of the land both when you bought the property and when you converted it to rental use. For items 1 and 2 your records will suffice. Items 3 and 4 should be backed up with professional appraisals by a licensed real estate appraiser to avoid any hassles with the IRS down the road. The IRS may not question your depreciation deductions year in and year out but they can still challenge what should have been *allowable* depreciation 20 years down the road when you sell. Your basis for depreciation once you convert it is the lower of the adjusted basis items 1 and 2 or the fair market value when you converted it to rental use. You then deduct the lesser land value (at purchase time or conversion time) from this figure to get the basis for depreciating it as a rental since you cannot depreciate land.



(3) correct it is your orginal basis. If you purchase or build a rental property for $200K your cost basis will be $200K. If you subsequently remodel the property for $20K, your new basis will be the original basis of $200K, plus the amount you spend on converting the property, giving you an adjusted basis of $220K. From the example, it is clear that additions or capital improvements increase the basis of a rental property, whereas depreciation and casualty losses decrease its basis. The adjusted basis is computed by taking into account all increases and decreases in the property's original basis

4)Form 4797; When you sell a business or investment property, you are subject to a 25 percent tax on all depreciation you have claimed.you need to recapture the unrecap depre taken previously ; this sec 1250 recap are taxed as ordinary income. The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax;if yu take aloss on the sale of th epty later then you do not need to recap sec 1250 deprecaition.

if the property was your principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the last 3 years before the date of the sale, you held the property as a rental property. You can still exclude the gain on the sale
You may be able to exclude gain from the sale of the property. The capital gain exclusion associated with the sale of a principal residence requires that you:

Thanks for your detailed response.

The property was bought in 2010 and sold in 2013 for a loss of $18k. Given this information, and the fact that I lived in it for only the first 22 months of the 3 year period I owned it, would it be correct to complete only section 1 of form 4797 for the entire period 2010-2013, i.e. I do not need to complete form 8949 or Schedule D? Or do I complete separate forms for the period I lived there (2010-2011) and the period it was rented (2012)?

Since there is no gain to report, do I need to complete part III of form 4797 and, if yes, which if any of the sections 1245, 1250, 1252, 1254 and 1255 would apply to this type of property (residential)?

Thanks in advance.

mvt926

only the first 22 months of the 3 year period I owned it, would it be correct to complete only section 1 of form 4797 for the entire period 2010-2013, i.e. I do not need to complete form 8949 or Schedule D? =========>>>>>>>>>>>>part 1 However, you do not need to recapture sec 1250 depreciation as you took losses on the sale of the home.If you did not sell or exchange any capital assets, have any capital gains income or non-business bad debts during the tax year, you most likely do not need to file a Sch D/form 8949.

Or do I complete separate forms for the period I lived there (2010-2011) and the period it was rented (2012)? =======>>>>>>>>no you need to report on the same form of 4797. Form 4797 is used to report the sale of property used for business. you who sold the property used for business(rental) must fill out the form.

Since there is no gain to report, do I need to complete part III of form 4797 and, if yes, which if any of the sections 1245, 1250, 1252, 1254 and 1255 would apply to this type of property (residential)?========>>>>>>>>>>no;sec 1250. However, as there is no LTCG on the sale of the home, no neeed to recapture the unrecap depre under sec 1250 rule. You must filee inPART # ONLY you sell it at a gain

Thanks once again for your detailed and prompt responses. I just have one more question. Upon completing part I of form 4797 by following the instructions for that form, I am ending up with a loss of around 10k on line 18b (no losses from form 4684 to be reported on line 18a). According to the instructions for that form, I am to enter that loss on line 14 of form 1040. I am having difficulty believing that this loss can be allowable and I suspect that I must be making a mistake somewhere, but I cannot see where. Are losses in the situation I have described really allowable against income? If not, where can I have gone wrong?

Could there be some passive activity loss limitation that I have overlooked? In reporting the net income for the property during the year it was rented, I used form 8582 and found that the amount of the losses that could be taken to form 1040 were limited. Would the same rules apply to the loss experienced on sale?

Thanks again.

mvt926

You must depreciate rental property since the depreciation is subject to recapture at sale time even if you don't take it while you hold the property for rental. To determine the basis you need several pieces of data: 1. Your original basis in the property. 2. The dollar amount of any improvements made while you occupied it as your residence. 3. The fair market value of the property when you converted it to rental use.

(1) how do I treat the period between the end of the lease on December 31, 2012 (when it ceased to be used as a rental property) and March 15, 2013 when the sale was closed?========>> as personal use as it ceased to be rental home any longer;an exception: you may continue to claim a deduction for depreciation on property used in your RENTAL activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. However, as you can see, the greatest boon in the tax law for property owners is the $250K/$500K home sale exclusion. This rule permits single homeowners to exclude from their taxable income up to $250k in profit realized from the sale of a personal residence. The exclusion is $500k for married couples filing jointly. There is no limitation on how many times the exclusion may be used during your lifetime.



Should I (a) treat the property as an investment property until the date of sale and complete a Schedule E for the 2 and a half month period at the start of 2013, or (b) treat the property as changing back to a non rental property on January 1, 2013 and deduct the mortgage interest, etc on Schedule A for 2013 (since the property was unoccupied for that period and not available for lease)?===>>>as mentioned above, if you place the home in service in a personal activity(no longer rental activity I mean), you cannot claim depreciation and do not need to file Sch E of 1040. However, only if you change the property's use to business, rental, or the production of income, you can begin to depreciate it at the time of the change and need to report rental income on SCh E of 1040. You usually place the property in service for business or income-producing use on the date of the change.

(2) In completing form 4562 for 2012, I used an estimated figure for the FMV of the building itself (and not the land) as the basis of depreciation.=>>>the depreciable basis is the lower of: (1) the home’s FMV on the conversion date or the home’s “regular cost basis”(ADJUSTED BASIS I MEAN) on the conversion date. Land is not depreciable.


This is based on the guidance given in publication 946, which states that land should not be treated as a depreciable asset. Is this the correct approach?=======>>>>>>>correct; Depreciation is applied to long-term, tangible assets. Rental properties are long-term assets meaning to last longer than 1 year and are tangible. As rental properties are rented out in order to produce revenue, said asset must be depreciated in order to comply with accounting rules.
you need to recapture your unrecatured sec 1250 depreciation on the building NOT on land(land is not depreciable) as ordinary income taxed at 25% unless your tax bracket is higher than 15%.Land does not qualify for depreciation; only structures qualify.

(3) In calculating the capital gain/loss on the property during the time it was used for rental purposes, is it correct to use a cost basis of the building plus land instead of just the building? This would (obviously) be different than the basis used for depreciation purposes.====>>>>correct you need to include land value in it; you bought your home, your original basis is the amount you paid for the home, including the cash down payment and the principal amount of any mortgage, plus certain settlement costs, including the following:Fees for title abstract;Charges for installing utilities, such as electricity and gas ;Legal fees for title search and for preparing the deed;Recording fees;Survey fees;Transfer taxes;Owner’s title insurance
If you as the buyer agreed to pay amounts owed by the seller, for example for back taxes or interest, sales commission, or charges for improvements or repairs, you can also include these in your basis.
ALSO,as mentioned above, you must recapture sec 1250 depreciation as ordinary income and this reduces the amount of long term capital gain exclusion($25)k for single/$500K for mfj); converting a rental into your residence will not eliminate all taxes when you sell it. While the home was a rental, you should have claimed a depreciation deduction for it each year. The total amount of depreciation you claimed during the rental period is not eligible for the exclusion. Instead, you must "recapture" all your depreciation deductions--that is report them on IRS Sch D and pay a flat 25% tax on these deductions as mentioned above. This can have a significant tax impact. In the example above, if you had taken $5k in depreciation deductions during the time she rented out the home, she would have to pay a deprecation recapture tax of $1.25k (25% x $5k = $1.25k).

(4) Which IRS form should I use to calculate and report the gain on the property during its use as a rental property?=====>>>you need to use form 4797/Sch D on line 19/Form 8949( I guess) and need to report sec 1250 gain on line13 of form 1040.