Contact Corey Robinson to find out about Property Changed to Business or Rental Use in Real Estate in King County and Seattle, Washington.
You cannot deduct a loss on the sale of property you acquired for use as your home and used as your home until the time of sale.
You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited.
Figure the loss you can deduct as follows.
- Use the lesser of the property's adjusted basis or fair market value at the time of the change.
- Add to (1) the cost of any improvements and other increases to basis since the change.
- Subtract from (2) depreciation and any other decreases to basis since the change.
- Subtract the amount you realized on the sale from the result in (3). If the amount you realized is more than the result in (3), treat this result as zero.
The result in (4) is the loss you can deduct.
Example.
You changed your main home to rental property 5 years ago. At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. This year, you sold the property for $55,000. You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Although your loss on the sale is $7,380 [($75,000 - $12,620) - $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows.
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Lesser of adjusted basis or fair market value at time of the change
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$70,000
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Plus: Cost of any improvements and any other additions to basis after the change
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-0-
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Subtotal
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$70,000
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Minus: Depreciation and any other decreases to basis after the change
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12,620
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Subtotal
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$57,380
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Minus: Amount you realized from the sale
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55,000
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Deductible loss
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$2,380
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Gain. If you have a gain on the sale, you generally must recognize the full amount of the gain. You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier.
You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. For more information, see Publication 523.
NOTE: The information provided herein has been collected from the IRS Website and is not guaranteed or endorsed by Heart of Seattle Homes.com or its affiliates. For more information, please contact www.irs.gov or a 1031 exchange qualified intermediary.
To find out more about Property Changed to Business or Rental Use contact Corey now!
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