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My husband purchased a house in 2003 for $150,000.

In 2010, the house became a rental, but the fair market value of the property (less the land) was about $110,000 and we were depreciating $3,958 per year.

In 2013, the house was sold for $142,000. We also paid closing costs of $4,000 and real estate commissions of $8,520.

I am trying to run an estimate of our taxes in TaxAct, but the software is showing a gain on the property of $32,000, plus reclaimed depreciation. Is that right? Or user error on my end?

Can you point me to the publication that would deal with this transaction?

Thanks so much for your assistance.
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Looks like user error to me, though I'm not a tax expert.

If you paid 150 and sold for 142 that sounds like an 8K loss.

Did you enter 110 somewhere in the software, because 142-110 is suspiciously 32K.
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Looks like user error to me, though I'm not a tax expert.

If you paid 150 and sold for 142 that sounds like an 8K loss.


Maybe you missed the fact that this property was converted to a rental several years after purchase, when its FMV had declined.

If you want a glimpse of how it works, see Pub 527. When I sold a rental I engaged the services of a pro to do that year's return. No way I was touching it.

Phil
Rule Your Retirement Home Fool
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I've got to go with user error.

You paid $150k for the property. Depreciation for 2010 through 2013 (I'll round a bit for the example - you'll need to use the actual depreciation you took each year) comes to about $15k. So your basis is down to $135k.

On the sale side, the sale price is $142k, less the closing costs and commissions totaling about $12k, so your net sale price is $130k.

So I'm coming up with a $5k loss.

I suspect the user error is forgetting to include the land value in the sale. While you can only depreciate the building (which you said was $110k), you still have to include the $40k of land in the sale.

--Peter
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I agree with Phil about getting help.

My gut feeling looking at this example (granted it is missing some facts) is there will be no loss and possible gain due to depreciation.

When you convert a home to a rental property where the FMV is less than your cost basis at the time conversion, ONLY the decrease in FMV since the conversion would be deductible.

In this example, you would have had to sold it for less than $110,000 and only that difference would be deductible.

Assuming the land was worth zero to keep it easy. He paid a $150,000 for the house. The FMV at the time of conversion was $110,000. So that $40,000 loss would be nondeductible personal loss.

So if you sell it for anything more than $110,000, there would not be a deductible loss.

If you sell it for less than $110,000, you will have a situation for a deductible loss for the difference between the selling price and $110,000.

I'm not sure any tax estimator can really handle this situation with mixed use.
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