I have carry forward loss from a rental property that I cannot deduct because our incomes exceed the limit to be able to take the loss. The property was purchased in 2003, and the carry forward loss now exceeds $50,000. If we move into the house next year, and our income drops to be eligible to take the loss, will we still be able to take that loss after we convert the property from a rental into our primary residence?
Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.
The accumulated unused losses can only be used at either of two occurrences and it is a whichever happens first. One of them is that you sell the property. Then the losses can be used against any gain you may recognize. The other is when/if the rental activities become profitable. The first can take place after the property becomes your primary residence but the second can only be while the property is used as a rental.
The house is in Las Vegas ... and is now worth much less than we paid for it, so if we sell it, there will be no gain (even with accumulated depreciation). By 2014, our income would allow us to claim carry forward loss. So the question, then, is whether it makes more sense to: a)sell the house at a loss (which could be done now or in 2013 or in 2014); b)move into the house in 2013 and fix it up (and either live in it or sell it in 2014). From a tax standpoint, what makes the most sense?
Logically, given the political climate and that this is an election year and that the Federal government has a huge deficit, taxes will increase soon. This may be accomplished by rate increases or simply removal of tax advantages. Thus, I would opt to sell it now. It is very unlikely that the homes value will increase sufficiently in the next two years to produce gains. And, later if your income declines your tax rate will also decline providing a lesser benefit for you if you continue to hold the property.
So the total accumulated loss -- minus whatever paper gain might occur based on the sale of a depreciated asset -- will be deductible in the year of the sale regardless of our income, right?
That is correct to a degree. If it becomes your personal residence then the only loss useful will be the accumulated rental losses. A loss on the sale of a personal residence is not deductible. Thus, if you wait until after you are using the house as your primary residence the only deductible loss will be the accumulated rental losses (also called suspended losses).