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CAPITAL GAINS BASIS FOR SALE OF RESIDENTIAL CONVERTED TO RENTAL PROPERTY:
Property rented for more than 5 years.
Original purchase 2005 purchase price plus improvements is 117,000.
The “In Service” 2009 Fair Market Value is 96,144.
Property sold 1/2018.
Can I use original cost plus improvements (117,000)for the cost basis? Or do I have to use the “lessor of the two” 96,114?
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John,
When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.
Now that you are selling, it gets a little trickier.
Calculating Gain/Loss on Subsequent Sale of Rental Property
If a residence converted to rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken.
If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property.
Victor Santucci EA
John,
Do you need further assistance with your original question?
Victor Santucci
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