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Anne
Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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A friend bought a house in October 2004 and lived in it until

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A friend bought a house in October 2004 and lived in it until August 2010 when she moved to another city. She rented starting August 1, 2010. For the next 25 months and rented it to several tenants and managed the property (although she did have a managing agent for some of the time). On her tax returns for 2010 and 2011 she deducted straight-line depreciation on the house. On form 8582 (Passive Activity Loss Limitations) she declared her rental loss as a rental real estate activity with active participation so that the loss offset current income. The loss for both years flows through to line 17 of form 1040 from Schedule E. In July 2012 she sold the house (and land) for a significant loss.
Questions: (1) Is the house a section 1231 (business) asset which would allow her to deduct $3,000 of the loss against ordinary income each year (going 2-years back or 20 years in the future)? (2) In 2012 she retired and had some investment income along with social security, but no wages. The loss on the rental in2012 was greater than her income. She has elected not to carry the NOL back. Is her schedule E loss added to her NOL from the sales of the house and carried forward?
In your answer please reference specific IRC sections.
Hi

Thank you for using jutanswer. You're on the right track, but you seem to have capital losses and business losses slightly confused.

Since your friend changed the property from her personal residence to business property, the sale of the home will in fact be reported on Form 4797 as 1231 business loss. HOWEVER, since this is a business loss, she is NOT restricted to just $3000 in loss. She will report the loss in full in the year she sold the property. Please see below:

Instructions for Form 4797

 

26 USC § 172 - Net operating loss deduction | Title 26 - Internal ..

 

Since she is reporting the loss on the sale of a rental home (which is now business property) on Form 4797, Sales of Business Property, then the loss on the sale of the rental property is added to the Schedule E. The same IRS Code 172 covers this also.

 

One note: if your friend is now retired, and her income will be less now than it was in the past, she might want to re-consider waiving the 2 year carry back time, since it may give her a better benefit to carry it back while she was working as opposed to carrying it forward when her income will be less.

 

 

I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

 

 

 


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Customer: replied 3 years ago.


Anne, what my friend wants to do is to use the NOL to cover a conversion of her SEP-IRA to a Roth-IRA, all of which is taxable to her. (She can then take out withdrawals from her Roth-IRA as she wants them and is not required to withdraw a certain amount based on her longevity. Roth-IRA withdrawals are not taxable to her. Also, her Roth beneficiaries, her children, do not have to pay taxes on what they inherit after she dies.) The NOL is slightly greater than her IRA balance currently. What should she do to evaluate if carryingback is better than carryingforward. How many years can she carry back? --Thanks, XXXXX XXXXX your insights. - Diana

Hi Donna

 

Thank you for that additional information. Now that I am aware of your friend wanting to put her previous tax deferred income into a Roth, then carrying the NOL forward makes more sense and I agree that carrying the NOL loss forward is a good decision for her

 

Again, I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

 

Customer: replied 3 years ago.

Thanks! I appreciate your thoughtful replies! Is there a way I can request you as a tax expert for future questions?

Absolutely! Just put in your question line "For Annelew".

It has been a pleasure working with you, and I look forward to working with you again.

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