Question

urendra’s personal residence originally cost $340,000 (ignoring the value of the 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: Loss. Depreciation. Gain. Could Surendra have obtained better tax results if he had sold his personal residence for $320,000 and then purchased another house for $320,000 to hold as rental property? Explain. Summarize your answer to this problem in an e-mail to your instructor.

Answer 1

a. Loss

When a property is converted from being for personal use to being for business use, 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:

Again, when a situation arises that a personal use property is converted to business, the depreciation is the same as the loss basis. 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.

Capital loss on personal property sales is recognized for deduction so Surendra would have incurred a loss of $20,000 had he sold the residence. He would not have obtained better tax results if he had sold the residence.