Question

calculating adjusted basis on sale of residential property converted to rental

oroginal

price is 68000

insurance reimb of 2700 for casualty

new windows for 3100

depreciation of 10040

Answer 1

When the property which was converted from residential to rental is sold, the calculation of basis different if there is a gain or if there is a loss. If there is a gain on the sale, the basis of the property is the original cost plus capital improvements if any, reduced by depreciation. If there is a loss on the sale, the basis of the property is the lower of original cost or the FMV on the date of conversion from personal to rental property reduced by depreciation. If the property sold within three years of renting it, the tax payer may be eligible to exclude the gain of $250,000 ($500,000 for married filing jointly).

Example: Original cost of property is $500,000. FMV on date of conversion is $400,000. Depreciation claimed is $50,000. Property is sold for $300,000. The property is sold for loss as selling price is lower than FMV on conversion date. Calculation of basis and tax loss is as below:

1. Original cost	$500,000
2. FMV on conversion date	$400,000
3. Depreciation	$50,000
4. Basis for tax loss (2- 3)	$350,000
5. Selling price	$300,000
6. Tax loss (5 - 4)	-$50,000

If in the same example, if the property is sold for $700,000, the property is sold at a gain as selling price is greater than FMV on conversion date. Calculation of basis and tax gain is as below:

1. Original cost	$5,00,000
2. FMV on conversion date	$4,00,000
3. Depreciation	$50,000
4. Basis for tax gain (1- 3)	$4,50,000
5. Selling price	$7,00,000
6. Tax gain (5 - 4)	$2,50,000