Hello, I would like to ask a question of any the tax expert opinion to confirm my own rental property tax conclusion before paying the $250 - $500 to a CPA for tax consultation for the same result.

Purchased a primary resident home $343,000(mortgage note of $300,000) in April 2007 in Florida and the cost basis at the time was $320,000 for the structure, land was $40,000. Downhill from there, of course.

Unable to sell so converted to rental home in January 2012 because of a relocation for work. The tax basis on 1/1/2012 was $185,000 for the structure, land was $30,000.

Here is my calculation if we sell the home for $280,000 in May 2016, I mean if.

Deprecation 27.5 year
Tax basis is 185,000 the day converted to rental
185,000/27.5/12 = 560.60 a month(or less)
560.60*53 months of renting out = $29,712.12

My new tax basis as May 2016 will be 185,000 – 29,712.12= $155,287.9

My IRS “so call capital gains” will be

$280,000 - $16,800(6% realtor commission) = $263,200
$263,200-$16,909 or less(carry over for loss deductions 4 years)= $246,291 or
$246,291 - $155,287.9 = $91,003.1
The capital gains is $91,003.1 regardless the so call “gains” belongs to the bank (owe $300,000)

We will have to 1st pay $16,800 (commission) out of pocket, 2nd pay $20,000 + some fees to close the note to the bank(because the note was $300,000), 3rd pay let’s say 15% capital gains tax on $91,003.1 * 0.15 or more = $13,650.47, finally, we pay extra $600 a month toward this rental home for mortgage, HOA, etc. because the rent is less than actual cost of monthly mortgage per month. $600 * 53 = $31,800

The worse of all, we are making just $5000 over $100,000 annual; the deduction is very little…. ($10,5000 - $100,000)*0.5 = $2,500 a year, let say $4227.27 or less carry over each year until May 2016

So….we are at a total loss if the home ever gets a buyer in May 2014
1st lost our down payment of $43,000
2nd sold rental property fee+tax $16,800 + $20,000 +$13,650.47 +$31,800(already paid in 53 months) = $82,250 the cash we don’t have…

Total damage - $125,250

So, the like kind exchange….. sold the home for $280,000 and because of the so call profit- $91,003.1; we can buy one or more property combine equal $371,003.1 or more. How are we be able to do that? We will be totally broke and trying to pay off the $50,450 associate with this so call “capital gains” 82250-31800 = 50450

Short sale or Foreclose sounds to be better idea now even the tax consequence is less than $50,450.

Please help me on my concept, the math is not 100% just to the point, I hope I am totally wrong!! And hope there is a way out… maybe there is something I don’t know about….

there is not going to be a net loss based on how IRS considers the tax basis, $185000 is and will be the lowest basis...



Thank you…

I forget there is depreciation recapture..... another tax 29,712*0.25 =7,428.00

Deprecation 27.5 year
Tax basis is 185,000 the day converted to rental”--------> For depreciation purposes: Lower of: FMV at date of conversion, or original cost. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the FMV of the property. Later, when calculating gain or loss, I believe it's adj basis; your adjusted basis on the date of the change is your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis.ALSO as yu have a primary residence that you convented into a rental. I understand that you will be losing the home sale LTCG exclusion UNLESS you reconvert it to personal use home.However, if selling a personal residence would result in a nondeductible loss, then you need to convert the residence to rental property since any loss realized while the home is a personal residence is never deductible.




“185,000/27.5/12 = 560.60 a month(or less)”---->Correct.
“560.60*53 months of renting out = $29,712.12 My new tax basis as May 2016 will be 185,000 – 29,712.12= $155,287.9”------->Correct; your adjusted basis is $155,287.9;whe you dispose of the rental pty later, you must recapture recaptured depreciation of $29,712.12 taxed at 25%;a special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1245/1250 rules. So any remaining gain attributable to unrecaptured depre previously taken, including s/l depre, is taxed at 25% rather than the LTCG rate of 0~15%. When yur tax rate is only 10 or 15%, the depre recap will be taxed at 10~15% to the extent of the remaining amount in the 10 or 15% bracket and then at 25%.




“My IRS “so call capital gains” will be

$280,000 - $16,800(6% realtor commission) = $263,200
$263,200-$16,909 or less(carry over for loss deductions 4 years)= $246,291 or
$246,291 - $155,287.9 = $91,003.1
The capital gains is $91,003.1 regardless the so call “gains” belongs to the bank (owe $300,000)”----------->Then your LTCG is $280,000-$16,800-$155,288=$107,912. However, as said previously, you must recapture unrecap depre previously taken,$29,712 as ordinary income. So, in this case, you must report $29,712 as ordinary income on form 4797 part 2 and also need to report the remaining LTCG,$78,200 as sec 1231 gain, LTCG on form 4797 part 1. The sale of any business property is reported on Form 4797. Residential real estate is reported in Section III as it is Section 1250 property subject to special depreciation recapture rules; that will be a 4797 and forwarded to form 8949/ SchD.
An NOL c/f is treated as used in a year to which it can be carried, even if you did not take the deduction. The NOL is deemed absorbed based on the correct taxable income, which reduces the NOL available in later years.You can’t reduce your LTCG by the amount of the NOL c/f. If you are carrying forward an NOL, youwould show the carryforward amount as a negative figure on the "Other Income" line of Form 1040. You will need to attach a statement to your return for the year you are deducting the carryforward amount, showing how you calculated the NOL. And, if you are carrying forward different NOLs, your statement should show them separately. The carryback and carryforward periods generally cannot be extended, and any NOL remaining after the 20-year carryforward period is lost,

Hello,

Thank you for sharing with me all the helpful knowledge and you have pretty much confirmed all my fears on the topic; moreover, saving me some money for not consulting with a CPA for answers which I already knew.
It is probably time to consult a lawyer regarding our rental property now. What an American dream!

We will not have a LTCG loss for this property according to the IRS, the true LTCG loss is the selling price lower than the adjusted basis; FMV is average $40,000 above tax basis here in Florida.

There is a zero chance of the home will be selling less than $155,288…..
Thanks again for the help!

“We will not have a LTCG loss for this property according to the IRS, the true LTCG loss is the selling price lower than the adjusted basis; FMV is average $40,000 above tax basis here in Florida. “--->OK I see as you said, you’ll have LTCG on the sale of the rental property, then after 2012, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 10~15% tax bracket).In 2012, the tax rate on LTCG is 0% for those in the 10% and 15% income tax bracketsand 15% for hose in the 25% or higher marginal tax rates.HOWEVER, since you used your home for business, or rented out any part of it during the time you owned it, even though you may not have to pay any capital gains taxes, you will have to pay tax on the depreciation of the business part of the usage. As sadi previously you must recapture unrecaptured deprecaiiton taken previously, and need to pay tax at ordinary tax rate, 25%.
Each person living in a home they own may sell their personal residences, and pocket up to $250,000 in profit without sharing with Uncle Sam. That means, if three people live there and are on title - you don't pay capital gains tax on the first $750,000 of profit.For a residential property to qualify as a residence, owners must live in it for a minimum of 2 years. Any two years out of five will qualify.You can rent out your property and move back into it before selling it. If you live in your home for 2 years out of the last 5 years before you sell it, you will qualify for the personal residence exclusion. However, as said when you sell it , you still MUSt recapture those unrecap depre taken previously. I mean you have Sch E rental property and say you convert it to personal residence before selling it then questions are:, does it stay on the books untill you sell the personal residence even if you live in it for 10 years and then do the 4797 or do you take it off the books on a 4797 when converted to personal residence??? Answer is: you just need to take it off the books put the depr history somewhere where it wont get lost for depr recapture when he sells it. Takin’ it off the books means just take it off the tax return you dont have to do a 4797 because it is converted to personal. to take it off the books you have to do a 4797 which is the sale but no sale has occured untill years later when person residence is sold and then they will take the 121.If you have more questions, please post maybe one or two questions at a time.