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 Dear Tax Talk:
I purchased property in 2006 and now anticipate a $30,000 loss. It is currently used as personal property. How long would I need to rent it for it to become rental property so I can use that $30,000 as a capital loss?
-- Angela
 Dear
Angela,
If only it were that simple. You cannot deduct losses on personal use property, such as a home or car. Gains on these items are taxable unless otherwise excluded, such as under the home sale rules that allow you to exclude up to $250,000 on the sale of your primary residence.
When you convert a personal-use asset to business-use, its basis becomes the lower of its cost or fair market value. If you change over the property to rental, you'll use the market value for purposes of computing annual depreciation deductions as well as any loss on its sale. You can still use the property's original cost for computing any gain.
For example, suppose the property cost $100,000 and it is worth $70,000. You convert it to rental use and claim $2,800 in depreciation on the property. If you sell the property in one year for $70,000 you will pick up $2,800 as depreciation recapture and have no other gain or loss on the property.
If you sell the property for $100,000, you will have the same $2,800 in depreciation recapture and no gain. If you sell the property for $65,000, you will have no recapture and will be able to claim a $2,200 loss ($70,000 value less $2,800 in depreciation gives you a $67,200 basis).
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