Discussion:Second Home-Tax planning
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Discussion Forum Index --> Basic Tax Questions --> Second Home-Tax planning
Discussion Forum Index --> Tax Questions --> Second Home-Tax planning
| 16 May 2008 | |
| Owner has a second home which he is planning to sell. (it was his primary residence and lived there about 4 years). However due to the market condition, he has to sell it at a loss (appx. $35k) Is he eligible to claim this loss anywhere on his next years return. Another scenario can he rent this property and sell it after a few months? Selling a rental property on loss, is it a better tax stragey? Please help.
Abstax | |
| 16 May 2008 | |
| Second home is a personal asset & loss on sale is not deductible. If he truly converts it to rental property, then loss on sale is probably deductible. I don't know how long he would have to rent it, probably 2 years. There are a lot of unknowns - Can owner live with negative cash flow? Does the owner have a landlord temperament? Do the economics of holding the property work? Etc. If these questions can be answered in the positive, it might work.
Taxes should never be the driver of a business decision. Having a good tax result will not turn a bad decision into a good one. | |
Death&Taxes (talk|edits) said: | 16 May 2008 |
| But if he converts to rental, the basis for the rental will be FMV at time of conversion, so that he would only deduct any future decline in value. | |
| 16 May 2008 | |
On this second home, does it qualify under 121? After he lived in it, did he have personal use or not? Recent court cases examined the amount of personal use for a property to determine investment vs personal use. It regards to the rental issue, converting a personal asset (residence) to an investment asset (rental) does not have a significant time requirement. It does require intent. If the intent was to rent it a few months, then sale it. If probably would not be an investment property due to that intent. If the intent was to operate it as a rental property, then due to business conditions the owner decided to sell it. That may be an investment property. NO rule exists in the number of days. Some suggest a holding period greater than one year and a day to show intent. Some suggest up to 2 year holding period. I worked an issue where the holding period was only a couple of months. It was questioned. We provided documentation of intent using the follwoing types of evidence:
Letter notifying Mortgage Holder than refinancing was required to convert property from primary residence to rental property as required by loan docs Documented advertising of unit in local paper Refinancing Mortgage to a commercial loan clasification Legal fees and Contractual Documents for renting property Organized LLC for rental property and quit claim title to LLC Various letters and documents stating purpose of property conversion from personal to investment Documented tax opinion related to converting personal to investment property We prevailed with our position. Hope these details assist. The bottom line is how well you plan the transition and document your true intention. | |
| 16 May 2008 | |
| Hi conversion doesnt do any good for the questioner D&T is correct the basis is lesser FMV or cost at conversion. So the real bottem line is no loss. bye | |
| 16 May 2008 | |
| Wes R is correct on conversion. I was considering gain not loss. My mistake on that issue. | |
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