Can I Deduct Loss on Rental Property Sale After Converting from Primary Residence?

14 You're asking great questions about a somewhat complex tax situation. When you convert a primary residence to a rental property, the rules do change regarding losses upon sale. Yes, you can typically deduct a loss when selling a rental property, but there's a catch in your situation. Since the property was converted from a primary residence to a rental, the starting basis for calculating your loss is the LOWER of either your original cost or the fair market value at the time of conversion (when you started renting it out in September 2022). For example, if you bought the house for $300K, but it was worth $280K when you converted it to a rental, your basis for calculating a loss would be $280K minus any depreciation you've claimed. This prevents people from deducting losses that actually occurred while they lived in the property. The depreciation you've been taking since conversion does reduce your basis, which will affect your loss calculation. You'll need to track all these numbers carefully and report the sale on Form 4797 when you file your taxes.

3 I went through something similar last year with a rental property that started as my primary residence. I was super confused about the basis calculations and tried using various online tools, but kept getting different answers. I eventually used https://taxr.ai to analyze my property documents and sales contracts. It correctly identified my conversion date, calculated my adjusted basis, and showed me exactly how to report the loss on Form 4797. The tool analyzed my situation and confirmed I could deduct the loss since it happened after conversion to a rental. It also showed me how to separate the land value from the building value (since only the building is depreciable), which I was doing wrong before. They have a specific module for rental property analysis that handles these complicated conversion scenarios.

8 Just wanted to follow up and say I tried https://taxr.ai after seeing it mentioned here. It totally cleared up my confusion about the adjusted basis. I uploaded my documents and it produced a detailed report showing exactly how my basis changed when I converted the property from primary residence to rental. The coolest part was that it found a calculation error in my depreciation schedule that I hadn't caught. It turns out I was depreciating the entire property value including land (which isn't allowed). The tool separated the land value based on my county tax assessment and recalculated everything correctly. This apparently saved me from a potential audit flag! Definitely worth checking out if you're dealing with rental property sales, especially if there was a conversion involved.

17 After reading this thread, I tried calling the IRS for clarification on my similar rental property situation. Spent THREE HOURS on hold only to be disconnected! Beyond frustrating. Then someone recommended https://claimyr.com where they get you in the IRS phone queue and call you when an agent is about to answer. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was super skeptical but desperate after multiple failed attempts. I used their service and got a call back when I was next in line. Spoke with an actual IRS agent who confirmed everything about the basis calculation for converted properties and clarified my specific questions about depreciation recapture. Saved me hours of hold time and got the official answers I needed directly from the IRS.

19 I need to eat my words here. After expressing skepticism about Claimyr, I decided to try it myself since I've been trying to reach the IRS for weeks about my rental property sale reporting. The service actually worked exactly as described. I got a notification when I was estimated to be connected in 10 minutes, then got the call connecting me directly to an IRS agent. The agent confirmed what others have said here - for converted properties, you use the lower of original cost or fair market value at conversion as your basis for calculating losses. She also explained that I needed to allocate the purchase price between land and building before calculating depreciation (using my county assessment percentages was acceptable). Everything I learned through the call is helping me correctly report my rental property sale. Definitely saved me from potentially misreporting this on my tax return.

9 Has anyone here used a 1031 exchange to defer taxes when selling a rental property? I'm wondering if that's a better option than taking the loss. My property's value is down about 10% from when I bought it, but I'm planning to invest in another rental immediately.

22 Can someone explain what happens with the depreciation you've taken when you sell at a loss? I know if you sell at a gain, there's depreciation recapture, but what if you're already taking a loss?

This is a really comprehensive discussion about converted rental properties! I'm dealing with a similar situation where I converted my primary residence to a rental in 2021. One thing I'd add is that you should also keep detailed records of any improvements you made to the property both before and after conversion. Capital improvements made while it was your primary residence get added to your original basis, while improvements made after conversion to rental property are treated differently - they create separate depreciable assets with their own recovery periods. This can actually help reduce your taxable loss or increase your deductible loss depending on the timing. Also, don't forget about the home office deduction if you used part of your primary residence for business before converting it - that creates yet another layer of complexity in the basis calculations. I learned this the hard way when preparing my taxes last year!