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I purchased a house in 2008 which was my primary residence. In April 2013, I converted to an investment property, since I was underwater to the point where I couldn't sell it.

In my 2013 and 2014 taxes, I treated the property as an investment, taking losses on depreciation and real expenses over rental revenue.

I just sold the property (November 2015). From what I've read, I have to calculate net gain on my property as my sales price minus the value of the home at the time it converted to an investment, rather than calculating a loss from the time I bought it.

I didn't do an appraisal or even a real market value analysis at the time I converted, so I have no idea what it was worth when I converted (only that it was significantly less than what I paid for it).

I plan on talking to a tax accountant to figure out how to handle this mess, but before I do, what should I keep in mind or prepare?

  • what value for the structure and land did you use when you started depreciating it? – mhoran_psprep Nov 23 '15 at 20:48
  • @mhoran_psprep Good point - I looked up my 2013 returns and I found a number there, but I don't remember where I got it. It was reasonable, so maybe I'll just use that. – Joe Enos Nov 23 '15 at 21:01
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Regarding gains and losses, it seems that you're confused. There are two calculations: one is for losses, and one is for gains.

For losses, you take your lowest basis (either when you bought it, or when you converted it, adjusted for depreciation).

For gains - you take your actual basis (your cost, adjusted for depreciation).

You may get into a situation where in the first (losses) calculation - you have no loss. In the second (gains) calculation - you have no gain. In this case - you have neither loss nor gain.

How to calculate the basis for losses (the value at conversion) - easy. Ask a license appraiser. They can provide an opinion for past prices, not only current. That would be bullet proof, but if you don't want to pay the money - you can try and appraise yourself based on comparable sales data, ask a local realtor or use the property tax assessment. However in case of audit, anything but a licensed appraiser's opinion will be questioned.

You should have used the conversion FMV for depreciation, so you need to check if that value was incorrect and fix it if it was. Use it, if it wasn't.

See here for more details and a clear example which fits your scenario.

  • Thank you very much for that. My head is spinning after reading that - I sold it for less than I bought it for, but more than it was worth at conversion - so is this a gain or a loss? And including the expenses over the last two years and closing costs and commissions, it was likely a loss even compared to the value at conversion. Pure cash dollars, I lost a ton. I think I'll have to hand all these numbers to a CPA, but from what you and the article say, it at least sounds like I won't have to register a large gain, which was my biggest concern. – Joe Enos Nov 24 '15 at 15:59

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