Personal Residence Converted To Rental

[alturact]

Bought a house as personal residence in 2001 . Converted it to a rental in 2013 and sold it 5/1/2020. Last tenant/rental income was for December 2019. However never moved back in and had no renters in 2020. Original cost in 2002 was $112,000. Improvements done up until conversion to rental were $65,000(new kitchen, new deck, new roof , finished basement etc) so basis at time of conversion was about $177,000.  Additional improvements during rental phase were approx $2,000 (new fence).  So basis then is about $179,000. Improvement done in  2020 after renter moved out are about $10,000 (new floor). Total depreciation taken during rental period is $32,830.  Sold for $229,500 with closing cost of about $23,500 (commission etc,  credit to buyer$ 6,898) .

I assume since didn't live in the house after 2013 that the only relevant factors her are as a rental? Does the FMV at the time of conversion have any bearing on the equation? I am not 100% certain I understand how all of this goes together to figure capital gains/deprecation recapture? Any input is greatly appreciated. TIA

[Hal_Al · Accepted solution]

Net proceeds are $206,000 (229,500-23,500).  206,000 - 189,000 (179K + 10K) Basis = $17,000 long term capital gain (LTCG). In addition, you have $32,830 of depreciation recapture.

Depending on how much total income you have LTCG are partially taxed at 0%, 15%, 20% and/or 23.8%. Depreciation recapture is taxed at your marginal rate, but not more than 25%.

Yes, you get no credit for the time it was your residence. The FMV on conversion is not relevant, in your case. 

[alturact]

Thank you!

[Rick19744 · Accepted solution]

While the above provides the correct result, the input into TT will be as follows:

• Selling price is the $206,000
• You basis is $156,170 ($189,000 original plus improvements less the $32,830 in depreciation)
• This results in a total gain of $49,830
• TT will then appropriately split the gain into the correct components of the gain
  • $32,830 in depreciation recapture
  • $17,000 in capital gain

The FMV of the property on the date of conversion might have come into the equation had the sale generated a loss, which is not the case based on your facts.

[alturact]

Thank you!