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A couple years ago, we started renting out our second home in Vermont. It is very much underwater, and we don't make enough in the seasonal rental income to justify holding onto it. I want to dump it. If we sell it for a big loss, does anyone know how we would figure out the basis for tax purposes? In other words, we can't get the tax benefit on the entire loss, because we only turned it into a rental year and the value had already dropped quite a bit at that point. How would we calculate the FMV last year at the time we turned it into a rental?
Really? I am sure I could respond "call your realtor" to every post on here, smart ass. But my life isn't as boring as yours apparently is.
Here is a starting point:
To determine FMV as of the time it was converted to rental, you should hire a "qualified appraiser" (as defined by IRS rules) to do a market appraisal of the value as of the date it was converted to rental property. As always, consult with a tax advisor.
If you have only rented out for a year, then the depriciation curve should not be very steep. It should not lower your base very much anyway. The exact FMV should not be very critical.
Hi Vic. Huh? We don't know (and don't care about) the original acquisition date and basis of the property when it was originally purchased for personal residence use, as it was not purchased originally for rental use, but was originally used for personal occupancy until its later convertion to rental use last year. So, the original cost basis (and its basis adjustment after depreciaion) is irrelevant, or am I missing something? The reason for the FMV appraisal is to re-set basis upon its converstion to rental property use last year. Am I missing something in this?
I have a slightly different case. I am selling a property with a gain. Planning to do a 1031 exchange to defer the gain tax. I also purchased the property originally as my primary residence but started renting it out 10 years ago. My accountant always calculate the depriciation using the original purchase price. I called him to double check after reading this post. He is still saying the same thing.
Gain is an entirely different matter. Here OP has a loss. Obviously no 1031 nneded in his case.
My account said that the price increase of my property came from its increase in land value (in Brooklyn). Therefore, the base of the price of the house was the same between the time when I purchased it and when I started renting it out 7 years later.
So what the OP has here is a loss. Most of the loss occurred while the house was being used for personal use (not rental use). The IRS disallows a capital loss on personal-use real estate, otherwise everyone would sell their underwater homes at a tax loss. When the home was converted to rental use, there is an opportunity to "re-set" the basis at the time of conversion to the the FMV at the time conversion. This re-set basis then gets reduced for depreciation annually going forward. Again, OP should consult his tax advisor. You have a gain: different story, as it is a gain and was purchased for rental (not personal) use.
While most of loss did occur while the house was used for personal use, we got it appraised last year as a part of a re-fi and the appraisal was MUCH higher than what we could actually sell it for. So maybe there is some opportunity to a tax benefit here? I don't know what the IRS will think of such a high appraisal in 2011 though, if the property ends up selling for so much less in 2013. Call is in to the tax advisor.
you are supposed to use the lower of your acquisition cost or the FMV of the property at the time it was converted to rental as the basis for calculating your loss. Having an appraisal - not so sure how that would stand up to scrutiny.
Bleh, it is on the IRS.GOV website, look it up.
Absolutely. Also in the link posted above: "The tax basis of the rental property is the lesser of the cost or the value when it is placed in service, plus any improvements, less any depreciation taken."