What is the name of your state? MI
Hi,
In 2003 I purchased a home for 143K, lived in it for 8+ years, then I converted it to a Rental in April 2012. The only reason converted to rental was because the home depreciated to the point that it was worth less than the mortgage balance. Anyway, at the time that the home was put in service the FMV of the house was about 78K which I took as my cost basis for tax purposes/depreciation.
Fast forward to now, the house has gone up in value to about 120K and the mortgage balance has gone down to about 90K. I really don't want to be a landlord and the tenants want to purchase the house so it makes some sense for me to sell the home now, pay the mortgage off and be happy not worrying about it anymore . However, I started researching how a gain or loss would be calculated in my particular situation and want to make sure that I am understanding everything correctly before I agree to sell the home.
It seems to me, based on what I have read doing google searches and IRS Pub 544 is that if there is a gain I can use the original purchase price as my cost basis but if there is a loss then I have to use whatever I used as my cost basis when the rental was put in service. This is a little confusing for me and I have not been able to find a similar example out there that explains the calculation. What I think would happen would be (assuming a 120K selling price as an example and 10K depreciation since it was put in service): 120K - 78K - 10K = 32K gain which would then be subject to capital gains (I think) plus any recapture tax. Is that correct?
Assuming my understanding above is correct, if I were to not sell the home and then wait until I could sell it for something over the original selling price of 143K, would the calculation be different? Assuming 145K selling price: 145K - 143K - depreciation? Is that how that would work? If so, it seems that it would be better to wait until the house appreciates above the original purchase price than to sell it now (at least in terms of the taxes to be paid on a gain).
Thanks for reading and any advise/education you can provide, I truly appreciate it.
Hi,
In 2003 I purchased a home for 143K, lived in it for 8+ years, then I converted it to a Rental in April 2012. The only reason converted to rental was because the home depreciated to the point that it was worth less than the mortgage balance. Anyway, at the time that the home was put in service the FMV of the house was about 78K which I took as my cost basis for tax purposes/depreciation.
Fast forward to now, the house has gone up in value to about 120K and the mortgage balance has gone down to about 90K. I really don't want to be a landlord and the tenants want to purchase the house so it makes some sense for me to sell the home now, pay the mortgage off and be happy not worrying about it anymore . However, I started researching how a gain or loss would be calculated in my particular situation and want to make sure that I am understanding everything correctly before I agree to sell the home.
It seems to me, based on what I have read doing google searches and IRS Pub 544 is that if there is a gain I can use the original purchase price as my cost basis but if there is a loss then I have to use whatever I used as my cost basis when the rental was put in service. This is a little confusing for me and I have not been able to find a similar example out there that explains the calculation. What I think would happen would be (assuming a 120K selling price as an example and 10K depreciation since it was put in service): 120K - 78K - 10K = 32K gain which would then be subject to capital gains (I think) plus any recapture tax. Is that correct?
Assuming my understanding above is correct, if I were to not sell the home and then wait until I could sell it for something over the original selling price of 143K, would the calculation be different? Assuming 145K selling price: 145K - 143K - depreciation? Is that how that would work? If so, it seems that it would be better to wait until the house appreciates above the original purchase price than to sell it now (at least in terms of the taxes to be paid on a gain).
Thanks for reading and any advise/education you can provide, I truly appreciate it.