I purchased a home in 10/2003 and lived there until 9/2007. On 1/2008 I made it a rental property and have rented it until the current time. I am trying to sell now and will have about 50K loss.
I took small amounts of depreciation and loss but limited as my income was over 150K. If I sell at less than 3 years as a rental do I get any tax loss? Does it offset capital gains first?
If I wait to jan 1, 2011 ( 3 years ) is my loss different? Does my loss offset capital gains or ordinary income?

Zip Code: 34239

Great question. We do need to be careful with these rules. Here are the basics:

1. A decrease in a home's value incurred while the home is used as a personal residence is not deductible.

2. A decrease in a home's value incurred while the home was used as a business property is allowable upon the sale of the property.

3. For your rental losses, all the losses that you have been carrying forward due to the $150k income limitation become fully allowable the year you sell the property.


So, for starters, you need to compare the amount you paid for the property plus the cost of improvements made up until the time you placed the property into rental use, with the fair market value of your home when it was placed into rental use. Your "basis" will be the lesser of those two numbers. Coming up with a way to support the Fair Market Value of the home back in the winter of 2007 may be challenging, however.

It doesn't matter whether you hold the home for more than 3 years to qualify to claim a loss. All that matters is that the home was truly a rental property when it was sold.

Assuming the home was worth more when you put it into rental use than it is today, you should qualify to report an ordinary loss when you sell it, which you can use to offset your wages and other income. The suspended rental losses will also be released due to the sale of the property, and allowable as an ordinary loss too. So selling your property can generate a substantial tax refund potentially.

I know these rules can be convoluted, so please let us know if you have any follow-up questions.

Zip Code: 01801