Dear Tax Talk,
We purchased a home for $1.5 million that is now worth around $1 million. Is it advantageous to rent the home for a limited time, then sell it to claim a capital gains loss? My adjusted income is well over $150,000 per year.
That would be a tremendous loophole if there ever were one. Unfortunately, Congress beat you to the punch.
I assume you know that you cannot claim a loss on a personal use asset such as your home, and this is why you suggest converting it to rental property. When you convert personal use property to business such as a rental property, your basis for depreciation and computing subsequent loss is the lesser of the cost or the fair market value at conversion. In other words, the cost of the property for computing capital loss after converting it to rental use is $1 million, less subsequent depreciation claimed.
Under this rule, if you sold the property a couple of years after renting it, you would still use the $1 million cost as your basis for computing loss. If you sold the property for $1 million, you would not be able to claim the $500,000 loss as a capital loss; it would be considered a personal loss.
For purposes of computing gain, you would use the $1.5 million original cost instead. Therefore, if you sold the property a couple of years after renting it out for somewhere between $1 million and $1.5 million, you would not recognize any gain. You would still recapture any depreciation claimed for the rental period.
Your reference to your adjusted gross income, or AGI, has more to do with claiming rental losses during the period that you hold the property for rental. Your level of AGI would not change the foregoing conclusion on your basis for losses.
Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.