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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121260  
Subject: House value when converting to rental Date: 4/14/2014 1:24 PM
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We still own our previous house, and are finally going to be getting renters in there soon after doing some work on it to make it rentable (such as while we didn't need the banister at the top of the stairs that the former owners ripped out when moving out, for safety reasons it needed to be there.

As of the start of 2013 we had lived elsewhere for 2.5 years, filing taxes from the new house and all the normal expectations of living in a new house, only going to the previous one to do repairs.

In filling out taxes now, I'm trying to figure out what value to put for it when converting it to a rental. While we moved out in late 2010, we haven't put that it has been a rental yet. I'm going to put down 1-1-13 as the date for converting to a rental.

Is there any advantage to putting a lower value or higher value for the initial value? I have the zillow estimate for that date, but when a mortgage was previously opened on it the in-home estimate was quite a bit higher due to an upgraded kitchen and such. I also have the tax assessment values on it, though their total of land plus buildings is much below market rates.

I don't think there is a way to use the "living in the house at least 2 of the last 5 years" tax deduction here, since we didn't do a formal change of ownership. But if it turns out that is possible, it would help us in the long run since the house is worth more than when we originally bought it.

Thanks
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120755 of 121260
Subject: Re: House value when converting to rental Date: 4/14/2014 3:41 PM
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In filling out taxes now, I'm trying to figure out what value to put for it when converting it to a rental. While we moved out in late 2010, we haven't put that it has been a rental yet. I'm going to put down 1-1-13 as the date for converting to a rental.

The conversion date is the date when the property was first available for rent. That is, when it was up-to-code and you began to seek a tenant. The value is the lower of adjusted cost basis or fair market value on the conversion date. Your adjusted cost basis would be your original purchase price plus the cost of capital improvements you made to the property during your ownership period plus certain improvements you made prior to renting. Some improvements (such as appliances) have their own depreciation periods. You should review IRS Pub 527 for information on residential rental property.

I don't think there is a way to use the "living in the house at least 2 of the last 5 years" tax deduction here, since we didn't do a formal change of ownership. But if it turns out that is possible, it would help us in the long run since the house is worth more than when we originally bought it.

Correct, you have to sell the property in order to exclude gain.

Ira

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120756 of 121260
Subject: Re: House value when converting to rental Date: 4/14/2014 4:32 PM
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I don't think there is a way to use the "living in the house at least 2 of the last 5 years" tax deduction here, since we didn't do a formal change of ownership. But if it turns out that is possible, it would help us in the long run since the house is worth more than when we originally bought it.

Correct, you have to sell the property in order to exclude gain.


Do you actually have to sell it, or does a change of ownership such as to a different family member or from "husband and wife" to "wife" (or "husband" to "wife") do it? What about moving it into a trust?

Obviously now that it's been 3.5 years for us (the 2 years isn't prorated, right?) it's too late, but I like to try to understand it.

Thanks

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120757 of 121260
Subject: Re: House value when converting to rental Date: 4/14/2014 5:01 PM
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Do you actually have to sell it, or does a change of ownership such as to a different family member or from "husband and wife" to "wife" (or "husband" to "wife") do it? What about moving it into a trust?

It must be sold. Transfers between spouses don't count.

If you gift it or sell at lower than market value to a relative, then you will need to deal with related party sales issues.

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120761 of 121260
Subject: Re: House value when converting to rental Date: 4/14/2014 8:20 PM
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Do you actually have to sell it, or does a change of ownership such as to a different family member or from "husband and wife" to "wife" (or "husband" to "wife") do it? What about moving it into a trust?

It must be sold. Transfers between spouses don't count.

If you gift it or sell at lower than market value to a relative, then you will need to deal with related party sales issues.


What about moving it to a family trust?

If you sold it at roughly fair market value, would there be a related party sales issue?

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120767 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 2:14 AM
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What about moving it to a family trust?

If you sold it at roughly fair market value, would there be a related party sales issue?


As long as it's the family trust of a family the current owners are not related to, either by blood or marriage. If the current owners are related to the family that holds the trust, how can it not be a related party sale?

AJ

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120770 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 10:05 AM
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Obviously now that it's been 3.5 years for us (the 2 years isn't prorated, right?) it's too late, but I like to try to understand it.

Thanks


You would have to move back into for 2 years to regain part of the primary residence exclusion, but the exclusion would still be split between qualified and unqualified time.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120771 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 10:08 AM
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If you sold it at roughly fair market value, would there be a related party sales issue?

A sale at fair market value to a relative is not a problem. I am not going to try to qualify "roughly".

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120774 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 5:52 PM
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I think you missed that the question you answered was linked to the prior question:

What about moving it to a family trust?

If you sold it at roughly fair market value, would there be a related party sales issue?


A sale at fair market value to a relative is not a problem.

What do you mean "is not a problem"? The OP was asking about the ability to exclude gains by 'selling' to a family trust. And by 'selling' it appears that the OP meant 'have a formal change of ownership'. Are you saying that the OP could have formally moved the title from "OP and spouse" to "OP and spouse Family Trust" and excluded the gain? Because that would be a problem.

AJ

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120775 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 7:30 PM
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What do you mean "is not a problem"? The OP was asking about the ability to exclude gains by 'selling' to a family trust. And by 'selling' it appears that the OP meant 'have a formal change of ownership'. Are you saying that the OP could have formally moved the title from "OP and spouse" to "OP and spouse Family Trust" and excluded the gain? Because that would be a problem.

Although I didn't provide the response, I think it was complete. Moving ownership to a family trust where anything less than full value is provided in exchange is a related party problem. Selling it at fair market value is not regardless of who purchases it. Nowhere was the air-quoted "selling" mentioned or implied.

Ira

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120777 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 9:04 PM
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Selling it at fair market value is not regardless of who purchases it.
I think if a husband sells a house to his wife (or together they sell it to the family trust) it's not going to be considered a real sale by IRS. At least I would think the IRS would look at that and say "Yeah, you're not really selling it, you're just retitling it - so you don't get to exclude the $250K of gains you had while you were living there."

If you can show me something different, please do - I have relatives that have a home they converted to a rental 2 years ago. And they're considering whether to sell it soon so that they can exclude ~32 years of cap gains on it. Or they just keep it and when they die their heirs will inherit the stepped up basis. If they can sell it to a family trust, and therefore exclude the gains so far, but also keep it as a source of income, I think they would. AFAIK that isn't a viable option though.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120779 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 10:01 PM
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"Yeah, you're not really selling it, you're just retitling it - so you don't get to exclude the $250K of gains you had while you were living there."

I thought, we had already covered that transfers between spouses aren't sales, but it doesn't hurt to restate it.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120780 of 121260
Subject: Re: House value when converting to rental Date: 4/15/2014 10:13 PM
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Nowhere was the air-quoted "selling" mentioned or implied.

The OP's original post said:

I don't think there is a way to use the "living in the house at least 2 of the last 5 years" tax deduction here, since we didn't do a formal change of ownership.

Then, the OP asked:

Do you actually have to sell it, or does a change of ownership such as to a different family member or from "husband and wife" to "wife" (or "husband" to "wife") do it? What about moving it into a trust?

and then followed up with:

It must be sold. Transfers between spouses don't count.

If you gift it or sell at lower than market value to a relative, then you will need to deal with related party sales issues.


What about moving it to a family trust?

If you sold it at roughly fair market value, would there be a related party sales issue?


I saw the air quotes because the OP continued to refer to both 'moving it to a family trust' and 'selling' in the same set of questions.

'Moving' a property into a family trust just requires re-titling the property. It's a different action than 'selling' to a family trust. Because mortgage lenders generally will not lend directly to a family trust, it's unclear how the family trust would have the money to buy the property at full market value, unless the OP's family trust has other assets that it would exchange for the property. Maybe there are other assets, but then I don't know why the OP continued to ask about 'moving' the property into a family trust.

Lenders do allow property to be re-titled ('moved') into a family trust after the mortgage is funded, if the original borrower(s) will sign documents stating that they remain personally responsible for the mortgage, even though it's the family trust that owns the property.

AJ
-cynical today

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120781 of 121260
Subject: Re: House value when converting to rental Date: 4/16/2014 9:20 AM
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AJ
-cynical today


Rereading the sections you quoted with a cynical hat on, I can see how you interpreted questions about transfers as 'selling'. When I read the original post without my cynical hat on, I took the questions at face value - "is a transfer equivalent to a sale?".

Ira

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