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Capital Gains Questions

During 2009 I had approximately $75,000 in net realized capital losses, mostly long-term but some short-term.

In the next 10-15 years I expect to have mostly moderate amounts of capital gains from mutual fund capital gains distributions.

In addition, I own a condo which I purchased and lived in for a year. I then moved out of state and converted it to rental property, it was vacant for about four months and has now been rented for a year and I expect to rent it for the indefinite future. It is worth less than I paid for it.

So I have the following questions:

1) Is it true that each year, starting with 2009, I take my capital gains for the year, net them to zero by reducing the accumulated capital losses, and I can deduct an additional $3000 from the accumulated capital loss on my taxes? Is the tax benefit of this loss equal to the long-term capital gains rate times $3000?

2) Is the cost basis for the condo the amount I paid for it, or the fair market value on the day I converted it to rental property?

3) Assuming that at the time I sell the condo I have not lived in it for two of the last five years, will any capital gain or loss be treated like a capital gain or loss on securities?

4) Suppose that sometime in the future I make a 1031 exchange of the condo for another rental property. Suppose that thereafter I move into the new rental property and live in it for two years. Does this now become a principal home with a cost basis equal to the cost basis of the former rental property? Would I have to rent the new property out for a period of time before moving in to show that it was a bona fide exchange of rental property for rental property?

Reply to
Hank Youngerman
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correct.

Perhaps. Could even be better if you reduce AGI and some tax benefits come back to life or are improved with lower AGI.

The lower one, but might have to adjust for capital improvements.

Depends on the type of property being sold.

The house itself is Section 1250 property, the land is Section 1231 property, (if the condo includes any common use land) any applicances such as refigerators and washer dryers would be Section 1245 property, and each takes its own type of tax treatment, as recorded on Form 4797.

Moving into the property could make you exclude any period of nonqualifying use, such as rental, from the aallowed gain exclusion.

See the new IRS Pub 523 for 2009, once the IRS releases that publication.

Reply to
Arthur Kamlet

Yes to first question. But the tax benefit is equal to your ordinary income marginal tax rate times $3000. Many states allow the the $3000 deduction against ordinary income.

The cost basis is the lesser of FMV on the day is was available for rent, or the true purchase price. In your case, the price decreased, so the FMV is on the day it was available for rent.

Yes, there will likely be capital gain.

But there will also be 25% recapture tax. When you rent out the property you have to take depreciation on the property value minus land. When you sell your house you will have to pay tax on the depreciation taken over the years. The tax rate is 25% or less if your marginal tax rate is less.

However, if you were not able to take a rental loss because of the passive activity rules, then the accumulated loss may balance out the depreciation that has to be recaptured, and there may be no recapture tax.

Reply to
removeps-groups

Yes.

More like your ordinary income tax rate times $3000.

For depreciation, the lesser of the two. For sale at a loss, ditto; for sale at a profit, the cost (adjusted for depreciation, capital improvements, etc.)

Mostly, but there's no depreciation to recapture on securities.

Seth

Reply to
Seth

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