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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a primary residence that I need to sell. However, it

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I have a primary residence that I need to sell. However, it appears I will have a loss in excess of $3000. Would I be better served to rent the property for a year then sell so that I can deduct the entire loss on the sale?

Note that I have purchased another primary residence this year (2012).

Thank you.
Sheila Williams
Texas

LEV :

Hi and welcome to Just Answer!

Customer:

Am I chatting with a tax professional?

LEV :

When you convert the property to rental - you will have two separate basis’s - to determine the gain and to determine the loss.
The basis to determine the loss is the lesser of your basis and the fair market value at the time the property was converted from personal to rental use.
Than means - if your property already lost some value BEFORE converting to rental - you will not be able to deduct that loss after converting to rental - that will be considered your personal loss.


Let me give you an example.

LEV :

For instance – you purchased the property for $100,000 – that is your basis.


After using the property as your personal – the fair market value changed and become $90,000. At that time the property was converted to rental. And after some time – it was sold for $85,000.
The basis to determine the loss is $90,000 – the lesser of your basis ($100,000) and the FMV at the time the property was converted from personal use to rental ($90,000).
Your deductible capital loss from that sale is $85,000(selling price) - $90,000(basis) = ($5000).

LEV :

I am sorry if you expected differently.
Please be aware that is very simplified example just to illustrate how the loss is determined on the sale of rental or income producing property which was converted from personal use.

Customer:

ok. so I'm going to have to absorb this loss with no tax savings?

LEV :

Unfortunately - based on your information - that is a personal loss - and no deduction is allowed for personal losses.

Customer:

is there any allowance? I purchased a house with cash that I owe ord income tax on.

LEV :

In case of capital gain realized on a personal property which was used as a primary residence - up to $250,000 may be excluded from taxable income.
However - the statute prohibit deducting any losses realized from selling any personal property.
If you have a loss on that sale - you do not owe any income taxes on that sale - but may not deduct that loss against other taxable income.

Customer:

so, are you saying that I may not owe tax on the funds from my retirement account that I used to buy my current primary house?

LEV :

I am telling that if you sell your primary residence and have a loss on that sale - there is no income tax due on that sale.
Your retirement account was not even mentioned and that is separate issue. Are you taking distribution from your retirement account? If so - what type of account do you have?

Customer:

but if there is a loss, there isn't any tax due, right?

LEV :

That is correct - income taxes are due on income. There is no taxes on loss.

Customer:

that is disappointing but I understand my situation now. Thanks for your help.

LEV :

Sorry if you expected a different answer.

Customer:

i had hope!

LEV :

Please do not shoot the messenger...

Customer:

thanks

LEV :

You are welcome.
Be sure to ask fro clarification if needed.

Lev and other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thanks, but no thanks.
Please be sure to ask for clarification.
You are welcome with all your tax related issues.

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