Selling a converted rental for less than original cost

Forum|Forum|6 years ago
February 8, 2020
8 replies
66 views

I purchased a house in 2004 for $160,000. In 2012 I needed to move, but could not sell the house due to the housing market crash. I converted it to a rental in 2012. I still owed $130,000 on the house, but the FMV was only $90,500. I had to use the lesser of the two to calculate deprection. I sold the house in 2019 for $151,000 (still less than the original price). After paying off the outstanding mortgage I received $37,000 at closing.

When entering these numbers into TurboTax under Rental and Royalties, it shows I had a huge gain and I owe a lot of taxes. The rental had $22,021 in depreciation. I never made a profit on the rental as I only charged rent to cover my mortgage cost.

Is this correct? Why do I need to pay so much taxes when I sold the house for less than the original cost? If I entered the information in the the Sale of Business section then it does not show I have a gain. Can I use this section to report the sale?

Carl

Level 11

Since you did not (because you could not) use the original cost basis to depreciate the property while it was a rental, you flat out can not report the sale in the Rental & Royalty Income (SCH E) section of the program. That'sw because the program will be basing your loss/gain on the adjusted cost basis used for depreciation, which we both know is wrong.

You have no choice but to report the sale in the "sale of business property" section. Pay attention so that you select NO on the first screen, since you did not sell the property at a gain.

Carl

Level 11

Why do I need to pay so much taxes when I sold the house for less than the original cost?

Depends on your selling price when figured against your "adjusted" cost basis after subtracting depreciation from it.

Remember, your adjusted cost basis is what you paid for it, minus all depreciation taken. So if you sold it for anything over that adjusted cost basis, you have a taxable gain. As I'm sure you're aware, recaptured depreciation is taxed no matter what. That is, unless your sales price wipes it out entirely, based on the adjusted cost basis.

It's really weird because in your specific case, if you sell at a loss, your cost bases is the FMV when placed in service. This will effectively reduce your tax deductible losses.

But if you sell at a gain, your cost basis is what you paid for the property (since it's higher). This effectively reduces your taxable gain.

But if your sales price results in a gain based on FMV at time of conversion, *and* a loss based on purchase price, that's not clarified in any IRS publication I can find. So I guess you just "flip a coin".

So if you're not totally confused at this point and realize you may need professional help this year, then it's obvious you haven't been paying attention. 🙂

RobertG

Level 12

Unfortunately, it sounds like you had a gain on the sale.

Your tax basis in a converted personal residence for tax loss purposes equals the lesser of: (1) the property’s normal tax basis on the conversion date or (2) the property’s FMV on that date.

This rule is intended to disallow a loss from a decline in value that occurs before the conversion date. That loss is personal and nondeductible.

So, from a tax standpoint, you took a $90,500 asset, claimed $22,021 in depreciation, and sold it for $151,000.

If you report those facts correctly, it should not matter where you report it, you will still have a gain. The amount of your mortgage does not figure into the calculation.

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