Can I Deduct a Loss from Selling My Rental Property that Was Previously My Primary Residence?

8 You're dealing with what's called a "conversion property" (from personal to rental), and there are specific rules for this situation. Since the property was converted from your primary residence to a rental, you need to establish the "basis" of the property at the time of conversion. For tax purposes, when you convert a primary residence to a rental, your new basis is the LOWER of: 1) your original cost basis (what you paid plus improvements) or 2) the fair market value at the time of conversion. This is important because if the property had already declined in value when you converted it to a rental, you can't claim that portion of the loss. So if the property was already worth less when you converted it in June 2023, that lower value becomes your new starting point for calculating rental property losses. You can then deduct losses that occurred after the conversion, but not the losses that happened while it was your primary residence.

12 Hey there, I went through something similar last year with a condo I used to live in. I was totally lost with all the conversion rules and basis adjustments until I tried taxr.ai (https://taxr.ai). It's basically an AI tool that analyzes all your rental property documents and explains exactly how to handle the property conversion for taxes. I uploaded my purchase docs, the appraisal from when I converted it to a rental, and my sale documents. It showed me exactly how to calculate my adjusted basis and what portion of my loss was deductible. It even explained how to report it correctly on my tax forms. Saved me from making a costly mistake on my taxes!

19 Just wanted to update after trying taxr.ai for my rental property situation. I was skeptical at first, but it really did help me understand my basis calculations. I had done some renovations right before converting my property to a rental, and I wasn't sure how to account for those. The tool identified exactly which improvements could be added to my basis and which had to be depreciated. The most helpful part was explaining how depreciation worked for a converted property. I had been calculating depreciation wrong for 2 years! It showed me how to correct my previous returns and set things right going forward. Definitely worth checking out if you're dealing with a rental conversion.

5 I had a similar situation last year and spent WEEKS trying to get through to someone at the IRS who could answer my questions about rental property loss limitations. I kept getting disconnected or waiting for hours. Finally found Claimyr (https://claimyr.com) and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent within about 20 minutes. The agent walked me through exactly how to handle my converted property situation and confirmed I was calculating my basis correctly. It was such a relief to get an official answer directly from the IRS instead of guessing or getting conflicting advice online. They basically call the IRS for you and then connect you when they reach an agent.

14 Okay I feel like I need to eat my words. After being totally skeptical about Claimyr, I actually tried it for an issue with my rental property depreciation. I had already spent 3 days trying to reach someone at the IRS with no luck. I was connected to an IRS representative in about 25 minutes, and they were able to answer all my questions about my converted property. They confirmed I was calculating my basis correctly and gave me peace of mind about my deduction. The agent even explained the correct way to report it on Form 4797 vs Schedule E, which I was confused about. If you're struggling to get answers directly from the IRS, it's definitely worth trying.

10 One thing to watch out for with converted properties - if you lived in it for 2 out of the last 5 years before selling, you might actually be better off treating it as a primary residence for the Section 121 exclusion (up to $250k/$500k gain exclusion) rather than taking a small rental loss. Obviously not applicable if you have a true loss, but something to consider if your area has appreciated.

22 Has anyone used the "safe harbor" method for determining FMV at conversion? My accountant mentioned something about using the tax assessment value but I'm not sure if that's reliable in my area since assessments are pretty out of sync with market values.

I went through this exact same situation two years ago when I converted my primary residence to a rental property. The key thing to understand is that you absolutely can deduct rental property losses, but only the portion that occurred after conversion. Here's what you need to do: Get a solid valuation of your property as of June 2023 when you converted it to rental use. This becomes your new basis for the rental property. Any decline in value that happened while you lived there is considered a personal loss and isn't deductible. Make sure you've been taking depreciation deductions during the rental period too - if you haven't, you'll still need to account for "allowed or allowable" depreciation when you calculate your final loss. Also keep detailed records of any improvements you made during the rental period, as these can be added to your basis. The IRS is pretty strict about the conversion rules, so documentation is key. If you're unsure about the fair market value at conversion, consider getting a retroactive appraisal or use comparable sales data from that time period.