I am assuming that when you begin initially in the program that you indicated that you were converting the house from personal to rental. At that time, you would have entered the cost.
The mortgage is irrelevant. All the IRS takes into consideration is Sales Price minus basis. Your basis can be adjusted by improvements, sales expenses and depreciation.
Sale of rental house if conversion of a primary residence to a rental : In order to calculate the capital gain or loss when you sell a residence that had been converted to rental property, you need to know three things:
- Your adjusted tax basis in the property (both at the time of the conversion and the time of the sale)
- The sale price
- The fair market value of the property when it was converted to rental property
If the converted property is later sold at a gain, the basis for purposes of determining the capital gain is your adjusted tax basis in the property at the time of the sale. If the sale results in a loss, however, the basis used is the lower of the property's adjusted tax basis at the time of the conversion or the fair market value when the property was converted from personal use to rental property. This loss rule ensures that any deflation in value occurring while the property was held as a principal residence does not later become deductible upon your sale of the rental property; a loss on the sale of a principal residence is not deductible. As usual, you calculate your capital gain by subtracting your adjusted basis from the sale price of the property.
