Rental to Personal Residence (2nd home)

#11 07-26-2003, 04:09 AM

- quote -

> > Not quite. If the property meets the residence rule, then
> > one only recaptures the post-May 7, 1997 depreciation, and
> > the amounts before that are ignored.

> True but that wasn't the issue being addressed.

I thought it was - cf. "I'm not certain prior rental usage
can be totally ignored" - It can be if the rental to
residence conversion is before May 1997!

- quote -

> > I have a feeling that Congress really meant this to apply to
> > home offices, but forgot about personal use of former
> > business property....

> You mean our elected officials....goofed? Surely you jest.

Oh-oh. Sooner or later, the term "congresscritter" may be
infecting this group! :-)

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#10 07-25-2003, 09:23 AM

- quote -

> > > > > If later sell the property, how long must the property have
> > > > > been held before the prior rental use can be ignored for tax
> > > > > purposes?

> > > > The house must generally be owned and used as a primary
> > > > residence for 2 out of the last 5 years to qualify for the
> > > > personal residence gain exclusion.
> > > > > > > But, I am not sure that the prior rental usage can ever be
> > > > TOTALLY ignored. The basis of the house must be reduced by
> > > > the amount of depreciation allowable during the rental
> > > > period (this might be "moot" if the resulting gain is within
> > > > the $250,000/$500,000 exclusion range) and the amount of
> > > > depreciation allowable after May '97 must be recaptured in
> > > > any event (this is NOT moot because such amount is taxable
> > > > REGARDLESS of the exclusion).

> > > I guess length of time is not the relevant issue, however,
> > > is the following true and thus prior rental usage can be
> > > ignored?: If one disposes of residential rental property
> > > placed in service after 1986 (or after July 31, 1986, if the
> > > election to use MACRS was made), you will not have any
> > > depreciation to recapture because you used a straight-line
> > > method.

> > It's not true because you recapture depreciation regardless
> > of the method used.

> Not quite. If the property meets the residence rule, then
> one only recaptures the post-May 7, 1997 depreciation, and
> the amounts before that are ignored.

True but that wasn't the issue being addressed.

- quote -

> I have a feeling that Congress really meant this to apply to
> home offices, but forgot about personal use of former
> business property....

You mean our elected officials....goofed? Surely you jest.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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#9 07-25-2003, 02:47 AM

- quote -

> > > > If later sell the property, how long must the property have
> > > > been held before the prior rental use can be ignored for tax
> > > > purposes?

> > > The house must generally be owned and used as a primary
> > > residence for 2 out of the last 5 years to qualify for the
> > > personal residence gain exclusion.
> > > > > But, I am not sure that the prior rental usage can ever be
> > > TOTALLY ignored. The basis of the house must be reduced by
> > > the amount of depreciation allowable during the rental
> > > period (this might be "moot" if the resulting gain is within
> > > the $250,000/$500,000 exclusion range) and the amount of
> > > depreciation allowable after May '97 must be recaptured in
> > > any event (this is NOT moot because such amount is taxable
> > > REGARDLESS of the exclusion).

> > I guess length of time is not the relevant issue, however,
> > is the following true and thus prior rental usage can be
> > ignored?: If one disposes of residential rental property
> > placed in service after 1986 (or after July 31, 1986, if the
> > election to use MACRS was made), you will not have any
> > depreciation to recapture because you used a straight-line
> > method.

> It's not true because you recapture depreciation regardless
> of the method used.

Not quite. If the property meets the residence rule, then
one only recaptures the post-May 7, 1997 depreciation, and
the amounts before that are ignored.

I have a feeling that Congress really meant this to apply to
home offices, but forgot about personal use of former
business property....

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#8 07-25-2003, 02:28 AM

Vernon Chatman <vernonchatmaniii[at]earthlink.net> wrote:

- quote -

> If one disposes of residential rental property
> placed in service after 1986 (or after July 31, 1986, if the
> election to use MACRS was made), you will not have any
> depreciation to recapture because you used a straight-line
> method.

That refers to an older "ordinary income" depreciation
recapture rule. Under current law, as I understand it, ALL
depreciation allowed or allowable on a rental property (to
the extent of gain) is treated as "unrecaptured section 1250
gain" subject to a special tax rate of not more than a 25%.
FWIW, note that the former case deals with a depreciation
RECAPTURE, whereas the latter is a case of UNRECAPTURED
GAIN. <g
If, however, you convert the rental to personal use and
subsequently qualify it as a personal residence, only
depreciation subsequent to early May, 1997 is subject to the
"unrecaptured" rule. Depreciation prior to that date would
apparently NOT be subject to any ~special~ rules (except,
perhaps, in the unlikely event that some other pre MACRS
recapture rule still applied).

MTW

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#7 07-24-2003, 05:07 PM

"Vernon Chatman" <vernonchatmaniii[at]earthlink.net> wrote:
- quote -

> "Michael T Wing CPA" <mtwingcpa[at]yahoo.com> wrote:
> > Vernon Chatman <vernonchatmaniii[at]earthlink.net> wrote:

> > > If later sell the property, how long must the property have
> > > been held before the prior rental use can be ignored for tax
> > > purposes?

> > The house must generally be owned and used as a primary
> > residence for 2 out of the last 5 years to qualify for the
> > personal residence gain exclusion.
> > > But, I am not sure that the prior rental usage can ever be
> > TOTALLY ignored. The basis of the house must be reduced by
> > the amount of depreciation allowable during the rental
> > period (this might be "moot" if the resulting gain is within
> > the $250,000/$500,000 exclusion range) and the amount of
> > depreciation allowable after May '97 must be recaptured in
> > any event (this is NOT moot because such amount is taxable
> > REGARDLESS of the exclusion).

> I guess length of time is not the relevant issue, however,
> is the following true and thus prior rental usage can be
> ignored?: If one disposes of residential rental property
> placed in service after 1986 (or after July 31, 1986, if the
> election to use MACRS was made), you will not have any
> depreciation to recapture because you used a straight-line
> method.

It's not true because you recapture depreciation regardless
of the method used.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

#6 07-23-2003, 12:56 AM

Bob Oaks wrote:

- quote -

> P.S. if you use this home as a second home (not primary
> residence), then when you sell you will also be taxed on all
> the appreciation, but at the capital gains rate, not the
> recovered depreciation rate.

Afraid not. The (now 25%) section 1250 gain applies to any
sale. Pre-1997 depreciation can be excluded under the
$250K/$500K exemption.

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#5 07-22-2003, 05:36 AM

I've done this myself. There are no immediate tax
consequences of converting the house from rental to personal
use (though I think my accountant put a note to that effect
in my next tax return). Eventually selling has a couple of
components, and can't really be "ignored". If you live in
the house for two out of five years as your primary
residence, you can take advantage of the $250,000 ($500,000
if married) capital gains exclusion for any appreciation,
including appreciation while it was a rental. But you
CANNOT avoid paying taxes on any depreciation you claimed
while it was a rental property. I think that rate is still
25%. That has to be recovered and cannot be sheltered by
the capital gains exclusion.

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#4 07-22-2003, 05:17 AM

"Vernon Chatman" <vernonchatmaniii[at]earthlink.net> writes:

- quote -

> If rental property (at the beach) is taken out of service
> (retiring and want beach home for personal use only), are
> there any immediate tax consequences?

No.

- quote -