The Tax Guy explains what you need to know to get started.
Residential real estate prices have fully recovered in many areas, and rental rates are strong. To take advantage of this favorable situation, you might be thinking about buying a new residence and converting your existing place into a rental property that you can sell later for a higher price. Good idea.
Tax basis for depreciation and loss on sale purposes You cannot claim a tax loss when you sell a personal residence for less than tax basis. The privilege of claiming tax losses is reserved for sales of business or investment property. The property’s normal basis usually equals the original purchase price plus the cost of improvements minus any depreciation that you’ve claimed over the years .
Reality check: In most areas, the odds of selling a property for a loss today are much lower than a few years ago when real estate prices were still in the doldrums. And the odds that the value of your property will decline after you’ve converted it into a rental may be even lower. But if the property’s value does continue to drop, converting sooner rather than later will produce better tax results for you under the special basis rule.
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