Closed/sold our rental house 2-2-17 (contract 12-30-16). Can we still treat as a rental in 2017 or will it be an investment; how do we handle the carry-over losses?

[dskolb]

We converted our primary house to a rental in July 2012.   In June of 2016 when the current tenants moved out  we decided to put the house up for sale, rent to own, or just rent.   On Dec 30th 2016 we finalized a contract to sell the house.  We closed on Feb 2, 2017.   For 2016 taxes we treated the house as a rental since we held it out for rent or sale until we had a firm contract on it.   We have $23,000 in passive carryover losses through the end of 2016.  How should I treat the house in 2017.   Can I still count it as a rental in 2017?  Or did it cease being a rental once we had a firm contract?  If I have to treat it as an investment in 2017 how do I write off the $23k in past passive rental losses? 

[TaxGuyBill · Accepted solution]

I would keep it as a rental property (even though it may be a "gray area" if that is technically correct).

When you go through the rental section to indicate you sold the property, then go through the "assets" to sell them, it should properly report the sale, including allowing the unused Passive Loss Carryover.

However, on the date you converted it to a rental property, if the Fair Market Value was less than Basis at that time (usually purchase price, plus cost of improvement, minus any prior depreciation), that involves special reporting that TurboTax does not handle well.  If that is the case, please post back.

[Hal_Al]

deleted

[TaxGuyBill]

@Hal_Al   I think it is questionable if they can be added to Basis.  In the event they do, it probably requires an election.

Also, TurboTax won't do the Passive Loss Carryover unless it is treated as a rental property in the current year.

[Hal_Al]

Good point about entering the passive loss carry over.  I've deleted my comment.
I think the election requirement for capitalizing carrying costs does not apply to the year of sale.

[TaxGuyBill]

The way I read §1.266-1, only certain things qualify for that election, and most property would not qualify (at least under §266).

(1) Land ("unimproved and unproductive real property").
(2) Property under construction (" real property, whether improved or unimproved and whether productive or unproductive ... paid or incurred for the development of the real property or for the construction of an improvement or additional improvement to such real property").
(3) Non-real estate under certain conditions ("personal property").
(4) Other things that the "Commissioner" thinks is allowable.
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/1.266-1">https://www.law.cornell.edu/cfr/text/26/1.266-1</a>

[Joe Stofik]

Turbo tax does not auto input or even ask for "Unused Loss Carry-overs" when you record the sale of Rental Property