Discussion:Rental property is converted to personal residence
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| 14 February 2007 | |
| client owns rental property in hills of Va.
Property has been fully rented for several years & at the close of 2005 has a passive loss c/o. in the event property is converted to a personal residence, are the losses realized in 2006? | |
| 14 February 2007 | |
| no, not until sold, and then §121 may apply, in which case the suspended losses may never be realized, except to offset §1250 gain | |
Death&Taxes (talk|edits) said: | 14 February 2007 |
| No,only on a complete and taxable disposition. | |
Michaelstar (talk|edits) said: | 14 February 2007 |
| Fully agree with the above two posts.
Note though that the t/p may be able to offset those unused passive losses should they invest in another passive activity and have passive income. | |
| 28 December 2011 | |
| In the situation I have, client has approximately 35 rental properties. He purchased a residence for his own use and after owning it for 2 years was transferred by his employer to another state. At that time he converted his residence to a rental and has had net profit on this rental. It was used as a rental for three years. His employer transferred him back and when the lease on his residence (one he converted to rental) expired, he renovated it and moved back in. During the time the residence was rented, the furniture, carpet and fixtures were heavily used and had to be replaced. Depreciation was taken based on FMV as of the date of the first lease and were depreciated three of the seven year life. Their value when the property was taken off the market was nil. My question is, Should the un-depreciated furniture, carpet and fixtures be written off in the year the rental was converted back to a residence? If not, how should the loss on the furniture, carpet and fixtures be treated? One school of thought is that this property reverts to personal property and no loss should be taken. Others say that as long as this property is "trashed" prior to client moving back into the house, they should be classified as a sale of business property and written of on Form 4797. | |
| 28 December 2011 | |
| I would just write them down (override depreciation calc) in the final year on sch E. | |
BobTheMobCPA (talk|edits) said: | 28 December 2011 |
| Kyle, can you see any passive activity loss limitation issues with your idea? | |
| 28 December 2011 | |
| Good point, Bob. If the client is limited already, increasing the carryover is of limited use. However, it seems that if the property was continuing to be rented, the same limitations would apply. Hard to justify a more aggressive treatment in the final year of Sch E. Shooting from the hip here a little bit. | |
| 28 December 2011 | |
| Haychuck, both of your friends' answers are correct. It totally depends on what the client did with the assets.
If the assets are truly scrapped as worthless, I see no problem with the 4797. That is the proper form for business use assets disposed of during the tax year. The fact that he has purchased replacement personal property helps support this position. On the other hand, if the client kept the assets for personal use, he has merely taken them out of service, and I don't believe that additional depreciation is warranted. But he'd have some basis left should he want to donate them to charity. Hopefully the basis and FMV are close if he wants to go that route. | |
