Residence converted to rental--am I missing something?

[JJStephens]

In 2010 client moved into a new home and began renting out his first home. In 2011 he realized he could not afford the new house so he converted it to a rental and moved back to the first place.

By the time he moved out of the more expensive house its value had decreased considerably (or he paid way too much for it--probably a combination of the two).

Now his financial adviser is telling him that since he converted the house to a rental he is eligible to take a capital loss on the decreased value. I know when a residence is converted to rental we use the lower of FMV or adjusted basis for depreciation purposes but I'm not aware of any way to take a loss on a property that has not been disposed of. Am I missing something?

[joanmcq]

You're not missing anything. Sounds like he gets his financial advice at the same bar or barbershop where our clients get their tax advice.

[JJStephens]

The adviser is an acquaintance of mine. Several years ago he wrote a personal finance book and asked me to write a couple chapters on tax. He didn't like what I wrote so he re-wrote it himself--I counted more than a dozen factual errors. He personally calls on me for tax advice, but prefers to give his clients his own advice rather than referring them to me.

[Terry D EA]

Start charging for the tax advice and I bet it stops.

[joanmcq]

I second that!

[schirallicpa]

does his financial advisor advise him to put a sticker on his car and write the car off.

I'm still arguing this one!

[Gail in Virginia]

Even if he has a "loss" it was on his personal residence being "sold" for rental property and loss on personal residence is personal not capital. I see no theory for this being deductible.

[JJStephens]

But doesn't converting it to a rental cause it to become biz property and then when you subtract the adjusted gross basis and divide by the subtrahend after taking the six month non-residence deduction you end up with a loss that causes you to get a refund larger than the sum of the credits to which you and all your relatives are eligible??!?! Or something like that?

[Gail in Virginia]

But doesn't converting it to a rental cause it to become biz property and then when you subtract the adjusted gross basis and divide by the subtrahend after taking the six month non-residence deduction you end up with a loss that causes you to get a refund larger than the sum of the credits to which you and all your relatives are eligible??!?! Or something like that?

Only on Tuesday and this is Monday.

[jainen]

>>I'm not aware of any way to take a loss on a property that has not been disposed of.<<

Mark-to-market has been a legitimate accounting method under GAAP for a generation. It just doesn't work very well for real estate (which was a MAJOR cause of the banking industry collapse in 2008). Well, tax law doesn't follow Generally Accepted Accounting Principles anyway. Only securities are eligible.