Forum Replies Created
October 14, 2019 at 3:58 am in reply to: Forms Needed For Sale of Investment Rental Property #4708
Thanks very much for your last post and I see no reason for your polite but apologetic “Sorry for my stumbling around with this.”
I appreciate your posts citing the pertinent IRC provisions. After reading and pondering them several times, I understand that generally an actual investment in a rental property will be automatically categorized instead as one used in a trade or business, even though no Schedule C would be appropriate.
It is clearer that this area is over my head and that it would be best to turn the tax return over to a CPA.
Thanks again.October 11, 2019 at 6:17 pm in reply to: Forms Needed For Sale of Investment Rental Property #4692
Thank you for pointing out that a rental activity is a passive activity under Section 469. I accept that to be so but I don’t follow why that means it is not also an investment. Please help me understand why if a rental may not be both a passive activity and an investment.
ruth, in your Oct. 10 post re whether a rental property is a trade or business and not an investment, I saw the following at https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals
“Top Frequently Asked Questions for Sale or Trade of Business, Depreciation, Rentals
“> What forms do we file to report a loss on the sale of a rental property?
“Answer: Rental property is income-producing property and, if you are in the trade or business of renting real property, report the loss on the sale of rental property on Form 4797, Sales of Business Property. . . . If your rental activity does not rise to the level of a trade or business, but instead is held for investment or for use in a not-for-profit activity, the loss is a capital loss.”
The point here is that the IRS does recognize that a rental activity may not rise to the level of a business or trade but instead may be held for investment which is the case as outlined in my 2 previous posts. In turn, Form 4797 (Sales of Business Property) should not be necessary.
snargle, ruth or anyone else, I welcome and appreciate your comments.October 10, 2019 at 6:17 am in reply to: Forms Needed For Sale of Investment Rental Property #4686
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.
I guess I’m OP. Does it stand for Old Poster?
That’s very thoughtful of you to want to let me know of snargle’s and your posts from July 13 on. Thank you again.
Your comment points out some of the pros and cons of using QDIV/LTCG against investment interest carryover. If this house owner did not have a very large amount of accrued investment interest expenss, he would probably just pay the regular income tax on his capital gain from his future house sale.
Thanks again for your help.
Many thanks for your very helpful posts.
As an incidental note, I have also read that the unrecaptured depreciation can be taken as ordinary income in Form 4952.
I’m sure you’re correct about line 4a of Form 4952. I had referred to line 4g but should have said that at least $25,000. in capital gain would be first entered in line 4d (Net gain from the disposition of property held for investment). In turn that would lead to the same entry amount in line 4g if the house owner elects to treat the capital gain as investment income.
The line 4g instructions are: “In general, qualified dividends and net capital gain from the disposition of property held for investment are excluded from investment income. But you can elect to include part or all of these amounts in investment income.
“The qualified dividends and net capital gain that you elect to include in investment income on line 4g aren’t eligible to be taxed at the qualified dividends or capital gains tax rates.”
I would like to use your comments to try to make correct calculations and I will include some numbers and dates to help calculate the pro rata treatment of the capital gain.
As you noted, “If basis is 125K less depreciation; then gain is 275K + depreciation.” Thus the house basis would be the purchase cost of $125,000. – $17,400. depreciation = $107,600. Then the gain is $275,000. + $17,400. depreciation = $292,400.
The house was the owner’s primary residence for 2-1/2 years from July 2006 to January 2009 (when it became rental property) and it will be again for 2 years from January 2020 to February 2022 when it will be sold, a total of 4-1/2 years of primary residence and 11 years of nonqualifying use.
As you also noted, “If exclusion is 250K – proration adjust, then taxable gain is 25K + proration adjust + depreciation.” The exclusion is reduced to $250,000. – 11/15.5 x $250,000. (proration adjust) = $72,581. Boo-hoo! Then the taxable gain is $25,000. + $177,419. + $17,400. depreciation+ = $219,819. Double boo-hoo!
Of the $219,819. taxable gain, the depreciation recapture will result in $17,400. being taxed separately at a maximum rate of 25%. The regular capital gains tax rate would apply to the remaining $202,419. or it could be entered on lines 4d and 4g of Form 4952 with an election to take it as investment income that would be fully offset by a larger amount of investment interest expense the house owner accrued in prior years.
Thank you for your help and any further comments about the foregoing would be much appreciated.
Thank you for your very helpful comments and link.
I’ll try to find out if there have been any more changes since the article in the link is now 5 years old.
Re the tax on a future house sale if he lives in it for 2 years: I assume he could elect to include at least $25,000. in capital gain as investment income in line 4g of Form 4952 (Net Investment Interest Expense). Could he do this also with the added proration adjustment to his gain and/or with the unrecaptured depreciation of $17,400.?