Sale of rental property at a loss - tax question

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Topic Author
ge1
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Joined: Sat Apr 28, 2012 8:15 pm

Sale of rental property at a loss - tax question

Post by ge1 »

We sold our vacation home last year, which since 2011 we used primarily as rental property. We took a sizable loss when selling the house and I'm comfortable with the gain / loss calculation, which I ran by a CPA at the time.

When doing my 2015 tax return, I realize that the loss is reducing my taxable income (which is great), I always assumed it would be a capital loss which can be used to offset future gains. Another pleasant surprise seems to be the fact that all those suspended passive activity losses, which accumulated over the years since using it as a rental, can now also be taken to reduce my taxable income.

This is double unexpected good news, so I just wanted to check with bogleheads who were in a similar situation (selling rental property at a loss plus accumulated passive activity losses), that this is correct?

I will run this by a CPA, as the numbers are too substantial to not involve a professional, but still curious what this knowledgable community thinks.

thanks
Two Headed Mule
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Re: Sale of rental property at a loss - tax question

Post by Two Headed Mule »

Looks correct. The sale of rental property at a loss is generally ordinary (unless you have other "section 1231 gains") and it is well-established that the sale of the rental/activity in a taxable disposition frees suspended passive losses. Since this was a real loser of an investment, make sure that the basis was reset to the lower of basis or FMV at the time of conversion for purposes of calculating the loss on sale, but it sounds like you already conferred with a CPA on this aspect of it.

Mule
Topic Author
ge1
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Re: Sale of rental property at a loss - tax question

Post by ge1 »

Thanks Mule. Yes exactly, I read the relevant publications and calculated the loss based on the FMV at the time when the property covered to a rental, which I can validate with an appraisal performed at the time for a refinancing.

This truly was the worst investment in real estate history, so it is nice (and unexpected) to get some of that loss back :-)
Topic Author
ge1
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Re: Sale of rental property at a loss - tax question

Post by ge1 »

I have a follow up question: I realized I didn't calculate my passive activity losses correctly in 2013 and 2014. Do I need to file amended tax returns for those years (even though my tax liability hasn't changed), or can I simply use the correct cumulative passive activity losses now in my 2015 return?

Thanks
Topic Author
ge1
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Re: Sale of rental property at a loss - tax question

Post by ge1 »

Bumping this one and hoping some of the tax experts here will jump in. I looked at form 1040X and none of the numbers will change (all that is changing is my passive activity loss which was non deductible in 2014), so maybe I don't need to amend my 2014 tax return and just use the correct passive activity loss carryover in my 2015 return? I realized 2013 was fine.

Thanks
SouthernCPA
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Re: Sale of rental property at a loss - tax question

Post by SouthernCPA »

ge1 wrote:Bumping this one and hoping some of the tax experts here will jump in. I looked at form 1040X and none of the numbers will change (all that is changing is my passive activity loss which was non deductible in 2014), so maybe I don't need to amend my 2014 tax return and just use the correct passive activity loss carryover in my 2015 return? I realized 2013 was fine.

Thanks
If you were my client, I would amend the returns. Even though the numbers on the 1040x are not changing, when you file a 1040x you are supposed to attach to 1040x all schedules/forms that are changing.

Without knowing your situation, I believe you fall in one of two categories for changing the PAL carryforward - 1. You forgot to include an expense on Sch E so while your PAL kicked in, you should have carried forward a larger amount that year with the additional expense. In this case, your Sch E (rental income/expense) and Form 8582 (PAL carryfoward) were both incorrect. IN this scenario you would correct the Sch E to reflect the new expense and then your larger disallowed loss will be reflected on the corresponding corrected Form 8582. Both would be attached to the 1040x.

If you just did not prepare the 8582, but none of your Sch E income/expenses are changing, then you just need to attach a corrected 8582 to the 1040x.

In either scenario, chances are you do not have a change in taxable income because the PAL Limitations kept the differences off the front of the 1040, but I would just be safe and amend those years with the attached corrected schedules to make sure everything is clear when you file 2015 and release the correct amount of suspended losses at asset disposal.
RamoniOba
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Re: Sale of rental property at a loss - tax question

Post by RamoniOba »

Ge1.....what documentation do I need to claim the loss on sale of rental property? Is there any literature I can read up on?
Topic Author
ge1
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Re: Sale of rental property at a loss - tax question

Post by ge1 »

RamoniOba wrote:Ge1.....what documentation do I need to claim the loss on sale of rental property? Is there any literature I can read up on?

I'm traveling and can't look it up right now, but for example TaxTopic 425 on the IRS website.
Topic Author
ge1
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Re: Sale of rental property at a loss - tax question

Post by ge1 »

SouthernCPA - thanks, I have engaged a CPA and will file an amended return for 2014.
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White Coat Investor
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Re: Sale of rental property at a loss - tax question

Post by White Coat Investor »

ge1 wrote:We sold our vacation home last year, which since 2011 we used primarily as rental property. We took a sizable loss when selling the house and I'm comfortable with the gain / loss calculation, which I ran by a CPA at the time.

When doing my 2015 tax return, I realize that the loss is reducing my taxable income (which is great), I always assumed it would be a capital loss which can be used to offset future gains. Another pleasant surprise seems to be the fact that all those suspended passive activity losses, which accumulated over the years since using it as a rental, can now also be taken to reduce my taxable income.

This is double unexpected good news, so I just wanted to check with bogleheads who were in a similar situation (selling rental property at a loss plus accumulated passive activity losses), that this is correct?

I will run this by a CPA, as the numbers are too substantial to not involve a professional, but still curious what this knowledgable community thinks.

thanks
Same situation for me this year. I'm writing off $50K. Really helps reduce the blow.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
RamoniOba
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Re: Sale of rental property at a loss - tax question

Post by RamoniOba »

This phases out for incomes above $150k. Oh well.
Two Headed Mule
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Re: Sale of rental property at a loss - tax question

Post by Two Headed Mule »

RamoniOba wrote:This phases out for incomes above $150k. Oh well.
I don't know what "this" refers to, but to clarify, there is no income phase-out or limitation for taking a loss (usually ordinary) on the sale of a rental activity. The income limitation you cited refers to a special rule that permits a taxpayer to take passive losses from an activity (deductions in excess of income) up to $25K while the activity is ongoing if certain additional requirements are met (otherwise the losses are suspended pending additional passive income or the disposition of the activity in a taxable transaction).

Mule
RamoniOba
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Re: Sale of rental property at a loss - tax question

Post by RamoniOba »

Let me provide some background on my situation.

Had to sell my old home I rented out due to relocating for a job. It cost me money for the 18months I had a tenant in there and more money when the tenant bailed out. I decided to sell to cut my losses which were:
1. Lost $25k from the sale (difference between buying and sale price - terrible market)
2. Carrying cost and cost of repairs until sale - $15k (Mortgage payment, utilities and repairs)
3. Closing cost - $24k (includes realtor cost, fees and $6k in property taxes)

Let me expand on the tax issue. We built the home and paid property taxes in arrears: sold in April 2015 but had to pay taxes for 2014 and Q1 2015 at closing.

Questions:
1. Can I claim the $25k in loss from the sale against my 2015 tax return? The home was rented for 2yrs.
2. Any tax benefit from the carrying cost expense? Engaged a debt collector against the tenants but have no hope of collecting as they have no assets.
3. Can I claim the property taxes in 2015 tax return?

Family income +$200k in event any of the tax benefit phase out at a specific income level
Two Headed Mule
Posts: 334
Joined: Sat Mar 28, 2009 8:38 am
Location: Brooklyn, New York

Re: Sale of rental property at a loss - tax question

Post by Two Headed Mule »

RamoniOba wrote:Let me provide some background on my situation.

Had to sell my old home I rented out due to relocating for a job. It cost me money for the 18months I had a tenant in there and more money when the tenant bailed out. I decided to sell to cut my losses which were:
1. Lost $25k from the sale (difference between buying and sale price - terrible market)
2. Carrying cost and cost of repairs until sale - $15k (Mortgage payment, utilities and repairs)
3. Closing cost - $24k (includes realtor cost, fees and $6k in property taxes)

Let me expand on the tax issue. We built the home and paid property taxes in arrears: sold in April 2015 but had to pay taxes for 2014 and Q1 2015 at closing.

Questions:
1. Can I claim the $25k in loss from the sale against my 2015 tax return? The home was rented for 2yrs.
2. Any tax benefit from the carrying cost expense? Engaged a debt collector against the tenants but have no hope of collecting as they have no assets.
3. Can I claim the property taxes in 2015 tax return?

Family income +$200k in event any of the tax benefit phase out at a specific income level
(1) When the property was converted to rental your basis was reset to the lower of FMV or current basis (the purpose of this is to deny a tax loss for any loss of value that occurred during the time you used the property for personal use; losses from personal use property, whether a house, a car, whatever, are not deductible). You have an ordinary loss if the sale price is lower than the basis as (possibly) refigured above, plus capital repairs made during rental, minus cumulative depreciation from the rental.

2) Utilities and certain repairs are currently deductible and should have figured into any annual loss on the rental. Annual deductible expenses include depreciation, minor repairs, mortgage interest (not principal), property taxes, etc. If these expenses exceeded income (rent) but were suspended by the passive loss rules, they were freed (usable) when the property was sold.

(3) I see no reason why the property taxes you paid at closing are not deductible in 2015.

Did you have a professional prepare the return the past few years?

Mule
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