Is sale of rental property at a loss considered capital or ordinary loss?

[RWMM]

What is the correct tax treatment of the sale of rental property at a loss?  Is it considered ordinary income or a capital loss?  I've seen different interpretations of this.

I purchased a condo in 2006 for my daughter to use while in college.  When she graduated in 2009 we converted it to a rental.  After three and a half years as a rental, we will be selling the condo at a loss next month of approximately $50,000.

I understand how to calculate the loss.  I know I have to use the lower of the original basis or the FMV at the time of the conversion to the rental.  I know to subtract out the accumulated depreciation from this value and to add in selling expenses and improvements.   My question is...is the $50,000 loss considered a capital loss which (in the absence of any other gains) is limited to $3000 per year for the next 16-17 years, or is it an ordinary loss which I can deduct in full from my AGI (under $100K)?

I am not a real estate professional and this is my only rental.  I do not rent out property for a living.  With depreciation factored in, we had small tax losses each year on the rental (under 5K) which we always reported using schedule E.  I am an active landlord in that I managed the property myself and collected rents, etc.

Some sources say this should be treated like any other capital investment loss and is therefore subject to the annual 3K limit.  Others say this is considered like business income (although it wasn't a real business for me) and the loss is ordinary and not subject to limits.  Which approach is correct?

[Rainman12]

$3k annual limit vs. other types of income still applies to capital loss portion. Form 4797 is used to report sale, and divide into capital and ordinary income/loss. Details and procedures at http://www.irs.gov/publications/p544/index.html
Note: Buildings are Section 1250 property ...

Form 4797: http://www.irs.gov/pub/irs-pdf/f4797.pdf
Instructions: http://www.irs.gov/instructions/i4797/index.html

[Hal_Al]

As you can see from the links Rainman12 provided, "It's complicated".

See http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Selling-Rental-Real-Estate-at-a-Loss/I...

[RWMM]

I don't see anywhere in Pub. 544 where it states that a loss on Section 1250 property is treated as a capital loss subject to the $3000 a year limitation.  From everything I've read the past few days, it appears to me that losses on the sale of rental property are treated differently from gains.  Gains on the sale of rental property are clearly capital gains, with the portion involving depreciation recapture possibly treated as ordinary income.  But losses on the sale of rental property seem to be treated as ordinary loss not subject to a $3000 per year limitation.

Unfortunately, publication 544 is long and complex, and the topics aren't necessarily laid out in an organized and logical manner.  Can someone knowledgeable about this document point me to specific pages and paragraphs that indicate that a loss on rental property is anything other than ordinary?

[Rainman12]

Pub 544, Chapter 4, Page 37, Center Column: http://www.irs.gov/pub/irs-pdf/p544.pdf
"Treatment of Capital Losses
If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return)."

[brandonhallnc]

Wow, this is so horribly wrong. I hope you haven't been providing everyone such bad advice.

Losses resulting from a rental property are fully deductible and can even generated carryback/forward NOLs. Learn your code dude.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Question...>

[ScruffyCurmudgeon]

@Rainman12 @Hal_Al  - comment?

[Rainman12]

I shall not dispute how TT handles this; what ends up on Line 14 probably belongs there.
Interesting note: Elsewhere, rental operations are considered a Passive activity, with 'exceptions' ...

[RWMM]

That paragraph assumes you have a capital loss.  What I am asking is where in Publication 544 does it state that a loss on the sale of rental property is considered a capital loss?

[Hal_Al]

See  http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Selling-Rental-Real-Estate-at-a-Loss/I....

It appears you are correct. I just did a practice problem on TurboTax (TT) and the full section 1231 loss  was deductible on this year's return. It will depend on how much of the loss was allocated to land, whether you get to deduct the full $50K. The land sale results in  a  capital gain/or loss. The building sale results in a section 1231 gain or loss. Just enter your info into TT' it will handle it correctly.

[RWMM]

In this case it was a condo sale, so land wasn't involved.  Interesting that TT would put the result on line 13 rather than line 14.  How would it handle the case where I had other capital losses subject to the $3000 limitation in addition to the $50,000 loss on the condo sale?  I suppose it would show $53000 as the capital loss?

[Hal_Al]

You are correct, TT puts it on line 14. Only the land portion was on line 13.