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Old 08-19-2011, 08:21 PM   #21
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Brewer12345, I had a similar situation on our 2010 tax return. We purchased a new home in Dec 2009. Had not been able to sell our old one so we rented it out in April 2010. In November, the renters decided they wanted to buy it so we sold it to them and closed on 01-01-2011, holding the mortgage ourselves. When we went to do our 2010 taxes, the CPA informed us that we would be able to claim a capital loss as we sold it for less than we paid by about $12000. Maybe if you could convert your residence to a rental for a year, then sell it, the whole picture is changed.

Actually, we sold it for at least $25000 less than we had into that house because of upgrades; however, I thought otherwise about filing an ammended return. In fact, the CPA wouldn't let us claim the entire capital loss in 2010. We have to do it $3000 per year. I didn't want to muddy the waters.
Johnnie, if you have capital gains from either the sale of investments or capital gain distributions from a mutual fund, you can use some of your unused capital losses against those gains as well and then up to $3,000 each year against other income until the losses are fully used.

If your loss was really $25,000 rather then $12,000 you might as well file and amended return and claim it - talk with your CPA.
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Old 08-19-2011, 08:27 PM   #22
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Johnnie, if you have capital gains from either the sale of investments or capital gain distributions from a mutual fund, you can use some of your unused capital losses against those gains as well and then up to $3,000 each year against other income until the losses are fully used.

If your loss was really $25,000 rather then $12,000 you might as well file and amended return and claim it - talk with your CPA.
I got so excited about the capital loss that I forgot to consider all the improvements we had made to the property. The CPA asked me for the purchase price and I had that readily available. I'm a little reluctant to stir the pot.
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Old 08-19-2011, 10:34 PM   #23
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After doing a bit more research, the standard IRS rule is the basis for the house should be reset to the fair market at fair market value at the time the house was converted from personal residence to rental property. After that reset in basis, the house is considered to be real estate investment property. At that point any of the usual rental property tax deductions (depreciation, expenses, etc) will apply.

Setting the house at the basis value of the house prior to conversion is wrong. I think your accountant knew this and was very conservative about his approach to setting the tax basis for your the house. If you did have a legitimatize capital loss incurred during the time the property was used as rental property, then you must take that loss at the rate of $3000 per year.

The discussion demonstrates how complex the tax code really is. If the rules are fully understood and applied properly, you can substantially reduce your tax burden.
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Old 08-19-2011, 10:55 PM   #24
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Given Brewer's move across the country I doubt that he wants to rent his former home. There are times to just move on even if the tax man cometh....
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Old 08-20-2011, 04:27 AM   #25
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Given Brewer's move across the country I doubt that he wants to rent his former home. There are times to just move on even if the tax man cometh....
Exactly.

Converting to a rental and selling a year later to lock in capital losses does not work too well imo. As mentioned above, you have to know the fair market value on the date on conversion, and when you sell it is against that value that a capital loss is calculated.

However, if the house appreciates and you end up with a capital gain, you have to calculate it based on the original purchase price plus all the capital improvements you made from that date.

Here is an article describing this.

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The special rule says that when you convert a former residence into a rental, your initial tax basis for calculating any later loss on a sale equals the lesser of: (1) the property s basis on the conversion date under the normal rule, or (2) the property s fair market value (FMV) on the conversion date.
In effect, the special rule disallows the loss from a decline in value that occurs before the conversion date. But a post-conversion decline will result in an allowable tax loss to the extent it's not offset by depreciation write-offs. (Because depreciation lowers the property s tax basis for loss purposes, it makes it harder to have a loss.)
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Old 08-20-2011, 06:41 AM   #26
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I agree. I wouldn't want to manage that property from a distance. Been there done that and it didn't work for me. I missed the part about Brewer moving across the country. Condo rentals are a little different. If you are in an area where those rentals are the norm, like beach condos, having a management/rental agency works well.
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Old 08-20-2011, 07:20 AM   #27
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Its all of what you are tuned into. Most people in this forum prefer the stock market; I played the real estate game all of my life. As a consequence, I had good contacts with agents and property management companies in my area. In the early days I did everything myself. But when I started to acquire 3 or 4 rental properties, I needed help.

Later in life I took an assignment overseas and left my rental units and house (turned rental) in the hands of a property manager for 2 years. Like all things, what suits one person doesn't fit everybody. Funny thing, I just got good at making big money in real estate and then I retired! Diversity makes life fun I guess
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Old 08-20-2011, 09:43 AM   #28
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Converting to a rental . . .
Anyone know the IRS Pub that covers this topic?

Bonus points for a linky.
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Old 08-20-2011, 10:12 AM   #29
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Anyone know the IRS Pub that covers this topic?

Bonus points for a linky.
Probably in 527

Publication 527 (2010), Residential Rental Property
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Old 08-20-2011, 10:14 AM   #30
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Old 08-20-2011, 10:18 AM   #31
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Here's a link to closest IRS publication http://www.irs.gov/pub/irs-pdf/p523.pdf

It's pretty complex with a lot of options.Here is an interesting discussion by tax attornies on Linkin:Can I change the cost basis of my primary residence if I convert it to a investment property? | LinkedIn Answers | LinkedIn

In this last link, a guy named Ken offers an interesting idea. Assume you bought your house for $300,000. Now it is worth $200,00. If you rent it out, you must reset the tax basis to $200,000 - no tax deduction. Ken suggests before you rent it out have a "friendly sale" to someone woh is a non-relative for the price of $300,000. A month later you buy the house back again for $300,000 and rent out the house as a property investment. This friendly sale resets the price of the basis of the house to $300,000. He concludes the cost of the two transactions would be too complex to be worth the $20,000 capital loss (the IRS taxes capital gains at the rate of 20%).
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Old 08-20-2011, 10:19 AM   #32
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Its all of what you are tuned into. Most people in this forum prefer the stock market; I played the real estate game all of my life. As a consequence, I had good contacts with agents and property management companies in my area. In the early days I did everything myself. But when I started to acquire 3 or 4 rental properties, I needed help.

Later in life I took an assignment overseas and left my rental units and house (turned rental) in the hands of a property manager for 2 years. Like all things, what suits one person doesn't fit everybody. Funny thing, I just got good at making big money in real estate and then I retired! Diversity makes life fun I guess
Are you still invested in real estate? If not, what did you move your big money into and why?
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Old 08-20-2011, 10:24 AM   #33
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Hmm Pub.527 or Pub.523?
Well you can see the IRS has not made this easy
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Old 08-20-2011, 10:30 AM   #34
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Presumably it is reviewed by a human before sending you a bill and a small penalty.
No, it isn't.

I'm not going to rehash the problem I had (actualy my disabled son) had a few years ago, which required the action of the Taxpayer Advocate's Office, along with my local congressman over 2+ years which resulted in threats of fines, selling off of personal assets, and more.

I'll just say in simple terms, the IRS (and its procedures) suc* ...
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Old 08-20-2011, 10:33 AM   #35
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Gracias!
de nada.

I am a pro bono tax preparer (TaxAide). As a secret agent for the IRS, I keep these links handy. You never know when you might need to take advantage of a taxpayer.
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Old 08-20-2011, 11:35 AM   #36
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Given Brewer's move across the country I doubt that he wants to rent his former home. There are times to just move on even if the tax man cometh....
Bingo. Looking to do the deal and lose a source of aggravation, despite the NJ exit tax and everything else. This must be what an overdue divorce feels like.

As for the tax code, I am a cfa, MBA and I do a job that involves voluminous rules and regs. I still get a letter purporting an error from a tax authority about every other year.
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Old 08-20-2011, 01:03 PM   #37
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Bestwifeever, my last job was as Public Works Director for a city in California. I became very familiar with municipal bonds. One variety is tax free, and backed by the General Obligation Fund of the City. That is, you get paid ahead of all other expenses the City must pay. Very secure, AA rated. In the year 2000 I locked in a tax-free interest rate of 5.5% per year for 20 years. One million dollars at 5.5% yields $4,600. I retired to Indonesia, bought a house in Bali, and live on the interest. I get back to the US once a year to visit family. I pay a bookkeeper $75/mo. to provide a US address and also handle miscellaneous stuff in the US - like filing paperwork that comes in.
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Old 08-20-2011, 10:44 PM   #38
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Bestwifeever, my last job was as Public Works Director for a city in California. I became very familiar with municipal bonds. One variety is tax free, and backed by the General Obligation Fund of the City. That is, you get paid ahead of all other expenses the City must pay. Very secure, AA rated. In the year 2000 I locked in a tax-free interest rate of 5.5% per year for 20 years. One million dollars at 5.5% yields $4,600. I retired to Indonesia, bought a house in Bali, and live on the interest. I get back to the US once a year to visit family. I pay a bookkeeper $75/mo. to provide a US address and also handle miscellaneous stuff in the US - like filing paperwork that comes in.
So you sold your properties, paid capital gains, and bought a municipal bond?
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Old 08-21-2011, 12:57 AM   #39
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So you sold your properties, paid capital gains, and bought a municipal bond?
Basically right. I spread the sale over several years and paid the 20% capital gains tax. But I remember writing a check for $156,350 to the IRS in April 2000. That was the first time and last time I ever wrote out a check that large. I remember laughing to myself because writing the amount "one hundred fifty six thousand three hundred fifty" is tough to fit on a small check. It took me three tries to print small enough.
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