We purchased a second home for $195,900 in April 2006 and used it as a vacation home. Due to a move, we then rented it out from October 2007 until October 2011. We were carrying approximately $20,000 in passive activity losses when we resumed using it for personal second home use in October 2011 (and had depreciated it about $8,000. ) We sold the house in June 2019 for $174,100, but I can't figure out how to report it. I tried through the "sold second home" search quick link, but when I start entering the information under investment, it eventually asks me if it was a rental property and says I have to report it as a sale of business property, but it was been used as personal property for much longer than it was used as a business property, so that doesn't feel legitimate. Help please!
Please see this answer from View2:
You can only deduct suspended passive-activity losses in 2 situations:
- Against passive-activity income
- When you dispose of the passive activity in a fully taxable transaction to an unrelated party
When you converted rental property into a personal home. The rental home had suspended passive-activity losses. So, you can continue to deduct the suspended passive-activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.
There are two ways to go about this:
- Since the program is not well-designed for you situation, you will enter the business portion in Sales of Business Property and include both your sales expenses and passive losses to the basis.
Then you will need to note the exclusion in Sale of Main Home.
You will have to prorate amounts between types of properties.
This will give you a better accounting of events.
- You can enter everything in Sale of Main Home. You will have to manually calculate the basis by subtracting the depreciation and adding the passive losses. This is easier but you will need to keep a good record of how you came up with the basis.
I want to do the easiest thing possible. At this point, I just want to be done with this property and all of the paperwork associated with it and don't care about trying to recoup the last dollar of tax write-off.
So if I report this as a sale of a vacation home, even adding back the depreciation, there's still no way we have any profits. Can I do that and just be done with it? So I'd follow the instructions for sale of a second home and just answer "no" when it asks me if it ever was a rental property?
I do have another rental property, so I could use my passive-activity losses against that passive-activity income, but is that legitimate once the property has sold if I'm not reporting it under sale of business property?
It depends, if you have both properties on the same Schedule E, the loss on the sale can't be recognized until you sell the other rental as well.
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I can't comprehend why folks are taking the simplicity of this, and going out of their way to make it as complex as they can. They're having you go around your elbow to get to your thumb. Makes no sense.
but it was been used as personal property for much longer than it was used as a business property, so that doesn't feel legitimate.
How it may feel doesn't play into this. The *FACT* is, you report this sale in the "Sale of Business Property". If you'll just "do it" you'll see and understand when you are done. Make certain you read the small print on each and every screen as you work it through. The small print *DOES* matter. The programmers didn't include it because they were bored.
Okay, I just did it: called it the sale of a business property. I read all of the fine print and none of it applied to me. It's crazy. If it was just the sale of a second home for a loss, it would have had absolutely no effect on our taxes. But because we used it as a business from 2007 to 2011 (even though our business expenses were always higher than our business income, so we never showed a business profit), the loss from the sale of the property is now subtracted from our income, making it a huge tax benefit. Feels wrong, but I answered every question correctly.