Question

Surendra’s personal residence originally cost $340,000 (ignore land). After living in the house for five years, he converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. As to the rental property, calculate Surendra’s basis for:________.

a. Loss.
b. Depreciation.
c. Gain.
d. Could Surendra have obtained better tax results if he had sold his personal residence for $320,000 to hold as rental property?

Answer 1

a. Loss

The basis for Loss is the lower of the basis after it is adjusted for its new purpose or the fair market value.

Adjusted = $340,000

Fair market value = $320,000

Loss basis will therefore be the lower value of $320,000

b. Depreciation:

This is the same as the loss basis because the residence was converted from personal use to business use.

= $320,000

c. Gain

= Adjusted basis of the property

= $340,000

d. No.

Because he would be converting to rental property which is a business use, the loss that he would have incurred of $20,000 would have been disallowed and he wouldn't be able to deduct it.

Loss = Cost - fair value = 340,000 - 320,000 = $20,000