Selling a rental property and converting a home to rental in the same year.

[hollymortensen]

I purchased a new house in Sept. 2023. I then sold my rental property in April 2024 to pay off my loan that I used to purchase the new house. I then started renting my primary home in June 2024 when I moved to the new house.  It looks like none of my rental expenses from the new rental are deductible this year, but expenses from the rental I sold are?  I'd like to make sure I get the max expenses deductible since I'm paying capital gains on the sale of the rental.  I appreciate any help available.

[PatriciaV]

Yes, you should be able to report your rental activity on the new rental from the date it was converted to rental use.

The entries are basically the same as for the former rental property. The only difference is how you set up the residence for depreciation. The date you started using it as a rental is the date you first listed the property as available to be rented.

According to IRS Pub 551 Property Changed to Business or Rental Use: 

If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.

The basis for depreciation is the lesser of the following amounts.

• The FMV of the property on the date of the change, or
• Your adjusted basis on the date of the change.

The best source for the Fair Market Value (FMV) on the date of the change would be a local real estate agent who can provide comparable sales. This is good evidence for the value of your home on that date.

Your adjusted basis is the original purchase price plus any improvements (upgrades or additions) that you have made. Historical property tax records may provide the price you paid for the home. Improvement costs would come from your personal financial records.

In most cases, your adjusted basis would be less than the FMV, so that is the basis you would use for your Rental Property.

Additional Information:

• Where do I enter income and expenses from a rental property?
• What kinds of rental property expenses can I deduct?
• How do I handle capital improvements and depreciation for my rental?

[hollymortensen]

Thank you for your response.  The issue I'm having is that the new rental expenses are all entered (including depreciation), and I have a loss.  Turbo Tax is saying that $0 of the $8,000 loss is deductible.  I received about $250k capital gains on the sale of my previous rental property (used to pay off my loan) and would like to reduce my tax burden.  Is there any way I can use the $8,000 loss on my new rental property to reduce my taxes this year?

[PatriciaV]

Unfortunately, passive losses cannot be used to offset capital gains, although they can be applied to any other type of income.