Vacation Home

[GraceNY]

Taxpayer purchased vacation home in June 2005.

Rented it out in 2006, 2007 and part of 2008. The circumstances as such in those years resulted in limiting the deductible expenses to the rental income (under the "vacation home" rules) with excess deductions being carried over.

Taxpayer made the vacation home their "primary" residence in Septemeber of 2008. (Living in it from 9-1-08 to the present with no rental).

Taxpayer may be selling vacation home soon for a loss. I KNOW PERSONAL LOSSES ARE NOT DEDUCTIBLE.

What about recapturing depreciation taken in 2006, 2007 and 2008 (about $3,000 total)? Taxed as ordinary income in the year of sale?

And, the carried over (unclaimed) deductions...they are lost, right?

Thanks in advance for your input...

Grace

[jainen]

>>the carried over (unclaimed) deductions...they are lost, right?<<

Yes, such expenses remain subject to the income limitation, so no income, no deduction.

But I think you've got things backwards, and I don't know what you should do about it now. In my opinion, expenses for mixed use property must be deducted in a certain order. Basis adjustments are LAST, so I don't see how you could have any depreciation to recapture if there wasn't enough income to cover all the operating expenses.

[GraceNY]

Yes, the expenses for the mixed use property were deducted in the correct order. I reviewed each year and the depreciation was used last to zero out the rental income. So, is this depreciation recaptured at time of sale in spite of loss?

Grace

[jainen]

>>is this depreciation recaptured at time of sale in spite of loss?<<

Probably not, but you have to be careful about allocating the sales proceeds to the personal and the rental uses. In some cases there could be a personal loss and a business gain, or a loss on some assets or improvements at the same time as a gain on others.

If there were Section 1245 assets such as furniture, those are subject to recapture to the extent of gain.

Section 1250 real property is only subject to recapture for any special depreciation allowance. However, any gain attributed to Section 1250 depreciation would be taxed at a maximum rate of 25%, not 15%.

Generally professional software will set this up for you, but in my opinion you need to closely review Form 4797 and Schedule D with any worksheets to make sure your entries achieved the result you expected.