Reply To: Forms Needed For Sale of Investment Rental Property

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#4686
fairira
Participant

Thank you very much, Ruth, for your informative comments.

Perhaps common sense does not apply but to me there seems a clear difference between a rental property held as an investment and one used in a trade or business. Schedule E’s Part I heading is “Income or Loss From Rental Real Estate and Royalties Note: If you are in the business of renting personal property, use Schedule C (see instructions).” This owner has not filed Schedule C and I assume he should not have since this is a passive activity investment that takes him less than 10 hours a year.

While Publ. 544 does state “Generally, property held for the production of rents or royalties is considered to be used in a trade or business,” its owner originally purchased it to live in. When he moved out of California over 10 years ago, he decided to keep it as an investment property since he anticipated an increase in its future market value. He converted it to a rental property rather than leave it unoccupied but did not hold it for the production of rental income which has been small and less than 1% of his income.

These facts may or may not change whether Form 4797 is required but his retention of the property was always intended as an investment. He wants to use Form 4952 since his accrued investment interest expense is more than his expected capital gain and unrecaptured depreciation, both of which he will elect to take as ordinary income. Form 4952’s line 4d is for the “Net gain from the disposition of property held for investment” and so he wants to be consistent that his rental property is an investment and not property used in a business or trade when Form 4797 would presumably be needed.

I would appreciate if you would be kind enough to comment further.

Thank you.