Renting before new construction and presumption of profit

[hz2020]

We bought a new home in 2017, with the intention to demolish and build a new home to be used as primary residence. The process is rather long, so we rented it out until Feb 2019 (we never lived there). Right now the house is being constructed and will be completed in 2021 at which point we'll move in and probably rent out our current house.

I've reported rental income for tax year 2017 and 2018. Due to high property tax in the area, both years had a rental loss. I will have a loss for 2019 as well. The house was demolished in Aug 2019 for construction (between Feb and Aug last year it was vacant). I have a few questions:

1. Should we report "we stopped using the asset for business" for 2019? If so, was it Feb or Aug?

2. When I was reading through pub 527, it mentioned "Presumption of Profits" in that we can only carryover rental loss if we are "presumed to be profitable", and IRS requires for 3 years in 5 years period I need to have a profit, and it doesn't look like I will. Should I file 5213? The form is rather confusing wrt how much postponement it can have - the end of 4th year or 5th. I won't have a rental profit until 2021.

Any suggestions how I should handle this?

[DianeC958]

1) Yes, you should report that you stopped using the asset for business in February.

2) Since you are converting the house to your personal residence, you do not need to file form 5213.  This form is used more for people that are actively engaged in a business other than renting property.

Rental Properties often have losses for many years and can go back and forth from being profitable to having a loss. 

There is nothing you need to file in addition to the information you have already filed for your rental property.

[Carl]

1. Should we report "we stopped using the asset for business" for 2019? If so, was it Feb or Aug?

You stopped using the asset on the day after the last renter moved out. On the "Special Handling Required?" screen, read it to understand why I"m telling you to select YES, then select YES. If you select NO you will be "forced" to enter sales information, and you did not sell the property.

2. When I was reading through pub 527, it mentioned "Presumption of Profits" in that we can only carryover rental loss if we are "presumed to be profitable", and IRS requires for 3 years in 5 years period I need to have a profit, and it doesn't look like I will. Should I file 5213? The form is rather confusing wrt how much postponement it can have - the end of 4th year or 5th. I won't have a rental profit until 2021.

Actually, it's rare for rental property to ever show a profit; especially if you have a mortgage on the property.

Any suggestions how I should handle this?

It seems apparent to me that you did not have, do not have now and will not have in the future, any desire to make a profit here. So you don't need to waste your time with the 5213 or anything else on this. Just understand that you can not claim any QBI on this either. Otherwise, you are saying you did this with the intent to make a profit.

Just treat it "as normal" showing it's conversion to personal use at least 1 day after the last renter moved out, and you're fine.

Since you have no intention of renting out the new structure, remember to keep the 4562's (both of them) and the 8582 from your 2019 return *FOREVER*. You will need the information in your future when one of three things happen.

1) You sell the property

2) You convert the property back to a rental

3) you die.

I suggest you file everything with your original purchase documents, which should also include your demolition/rebuild costs since that "WILL" change your costs basis when one of the three above things occurs in the future.