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Tax Law (Questions About Taxes)/Questions on Rental Property

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Question
Hi John,

My husband and I are possibly relocating to CA from PA for employment purposes. We currently own a home in PA (have owned since 2007) and are interested in understanding the tax repercussions/impact on our personal finances if we decide to rent our home since our mortgage is currently upside down.  I have three specific questions about this.

1. I understand that we can deduct mortgage interest, real estate taxes, insurance, homeowners association dues, repairs and depreciation.  My question is how long can we rent the property before the IRS would consider it a rental property and we would lose the exclusion of gain on sale of a personal residence.  In other words how long do we have to rent it before we take a loss on any gain from selling the property as a personal residence.

2. My other understanding is that we can take a passive loss up to $25,000 if the expenses of the rental exceed our rents.  However, couples filing jointly who's gross income is above $150,000 are limited on the passive loss amount.  We are estimating a gross combined income of $225,000... would we be too far above the income limit to actually deduct any passive loss?

3. Finally, if we do end up renting the property for the a length of time that it becomes a rental property what would be taxes we would have to pay for the rental property.

Thank you for your help!

Answer
Kendra,

Thanks for your question.

1. It is a rental property from the first day it is rented.  However, you do not lose the exclusion of gain until you have not lived in it for 24 of the prior 60 months as your main home.  The item here that often trips people up is if they default on the mortgage. Once it is a rental, the house is no longer their primary residence and you would not qualify to exclude the cancellation of debt income.

2. You will not get and deduction for the loss at that level of income.

3. You would pay tax on the gain if sold outside the 24 month window.  Gain would be the difference in the adjusted basis and proceeds of the sale.  For rental purposes, it would be depreciated at the lower of its FMV or cost basis and any depreciation would be used to reduce the basis.

Hope this helps.

John Stancil, CPA  

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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