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Sale of a primary residence converted to rental property

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Level 2

Hello - 

I encountered a little bit of a complex situation while prepping to report a sale of a home for a client and am hoping for some advice and guidance.

1.  They sold their primary residence at a loss during 2018.    

2.  They moved out of the place (called main house)  in the middle of 2017.  It was rented on Jan 1, 2018.  They sold it in September of 2018.  

3.  There's also guest house on the property which has been rented for the past several years, even when they were living there.  The prior accountant assigned a value to the building and has been reporting depreciation since it was rented.  

What is the best way to report these transactions?  I know there's depreciation recaptured for the main house and guest house.

What to put down as the sale price for the 2 rentals?  How to tie this back to the main home exclusion form?  They lived in it up through June 30, 2017 and before.  

Thank you for any assistance you can provide.

 

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2 Replies 2
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Level 10

You say "They sold their primary residence at a loss during 2018. " Does this include the entire property, and the guest house?

Then there probably isn't any gain to exclude. The guest house piece has an adjusted basis due to the depreciation, but if that piece has a gain it cannot be exlcuded.

** I'm still a champion... of the world! Even without The Lounge.
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Level 3
Level 3

Also keep in mind, that at the date the home was converted to rental, the basis is the lower of cost or the FMV at that time.

This is often forgotten or missed.  FMV must also be used when determining if there is a loss on the sale.  See the attached Publication 527.  The basis matter on conversion is discussed beginning on page 15.

https://www.irs.gov/pub/irs-pdf/p527.pdf