Converting Short Term Rental to Vacation Home: How to File Forms 4797 and 8949 for Property Sale

I bought a beachfront condo back in 2010 that I used as a short-term rental property until about 2016, when I decided to convert it to just a personal vacation home. Now I'm selling the place this year and trying to figure out the tax situation. I've accumulated approximately $65,000 in depreciation expenses that I know I need to recapture, plus I have around $31,000 in unallowed passive activity losses that I want to realize this year when the property is sold. I've been doing some research and it looks like I might need to use both Form 4797 and Form 8949 since the property changed use from rental to personal. My question is, how exactly do I split this up on my tax forms? Do I need to file both forms, and if so, how do I determine what goes where? This is my first time selling a property that changed use like this, and I want to make sure I handle the depreciation recapture and passive losses correctly. Any advice would be appreciated!

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18 comments

Andre Dupont

•8M

Yes, you're on the right track! When you sell a property that was converted from rental to personal use, you'll typically need both Form 4797 and Form 8949. Here's how to handle it: The portion of the property's use that was business-related (your rental period from 2010-2016) gets reported on Form 4797. This is where you'll recapture the $65,000 in depreciation you took during those years. The depreciation recapture will be taxed at a maximum rate of 25%. For the portion used as a vacation home (2016 until now), you'll use Form 8949 and then Schedule D. Since you've owned the property for more than a year, the gain attributed to this period would be long-term capital gain. The $31,000 in unallowed passive activity losses can be fully deducted in the year of sale against any type of income, which is great news for you. This gets reported on Schedule E, and these previously disallowed losses will help offset some of your tax liability.

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Andre Dupont

•8M

The allocation between Forms 4797 and 8949 isn't necessarily based on a simple time percentage. Instead, you need to determine the fair market value of the property at the time of conversion (when you stopped renting it and converted to personal use). For the business portion on Form 4797, you'll report the difference between the original cost basis (plus improvements) and the fair market value at conversion, adjusted for depreciation taken. For Form 8949, you'll report the difference between the fair market value at conversion and the final selling price. This approach ensures you're properly allocating the gain between business use and personal use.

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Zoe Papanikolaou

•8M

After dealing with a similar situation last year, I found https://taxr.ai incredibly helpful. I was confused about how to properly allocate everything between the forms and getting the depreciation recapture right. I uploaded my previous tax returns and property documents to taxr.ai and it was able to analyze my specific situation and outline exactly how to report my converted rental property sale. The tool walked me through determining the property's FMV at the time of conversion and calculated the correct split between business and personal use. It even provided a detailed summary I could give to my accountant showing exactly how much went on each form and why. My case was complicated because I had partial personal use during my rental years too.

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Zoe Papanikolaou

•8M

The accuracy was impressive for my situation. It used comparable property sales from my area around my conversion date to help establish a reasonable FMV range. While not a replacement for a formal appraisal, it gave me confidence in the values I was using and my accountant was satisfied with the documentation it created. I used TurboTax, but the guidance is software-agnostic. It gives you the specific IRS form line numbers and explains the calculations, so you can input the information into any software. It's more about understanding what goes where and why, rather than clicking specific buttons in a particular tax program.

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Mei Lin

•8M

I wanted to follow up about my experience with taxr.ai after trying it based on the recommendation here. It was actually really helpful! I was worried about how to properly document my FMV at conversion since I didn't get an appraisal back when I converted my rental to a vacation property. The tool analyzed my property's location, features, and historical data to establish a defensible FMV for the conversion date. It then created a detailed breakdown of how to split everything between Form 4797 and Form 8949. What impressed me most was the audit-ready documentation it generated explaining the methodology, which gave me peace of mind in case the IRS ever questions my filing. It definitely made this complicated tax situation much clearer!

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Liam Fitzgerald

•8M

For anyone dealing with IRS questions about property conversion or struggling to get answers about forms 4797/8949, I had success using https://claimyr.com to actually reach a human at the IRS. I had been trying for WEEKS to get clarification on how to handle my beach house conversion (rental to vacation home) and kept hitting automated systems or 2+ hour hold times. Claimyr got me through to an actual IRS representative in about 20 minutes who walked me through the specific line items I needed to complete. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c. The agent was able to explain exactly how to document my situation and confirm I was taking the right approach with recapturing depreciation. After months of stress, it was actually pretty straightforward once I could talk to someone knowledgeable.

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Liam Fitzgerald

•8M

It uses a completely legitimate method that navigates the IRS phone system using the same options available to everyone. The difference is they have proprietary technology that continually monitors and connects with the IRS phone system, essentially waiting on hold for you, then calls you once they've secured a place in line. I was skeptical too, which is why I waited so long to try it. But after months of frustration, I gave it a shot. They don't have a "special" line - they just have technology that does the waiting for you and knows the optimal times to call. The IRS agent I spoke with was just a regular representative, but getting to them without wasting hours of my day made all the difference.

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Giovanni Mancini

•8M

I need to eat my words and apologize for my skepticism about Claimyr. After continuing to fail getting through to the IRS myself about my rental property conversion issues, I finally tried the service out of desperation. Within 35 minutes, my phone rang and I was connected with an IRS tax specialist who actually understood the nuances of forms 4797 and 8949. The agent confirmed I needed both forms and explained exactly how to calculate the allocation between business and personal use. They even emailed me a reference guide for rental property conversions. I was able to resolve questions that had been stressing me out for months in a single 20-minute conversation. I've never been happier to be wrong about something!

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NebulaNinja

•8M

Just a quick tip from experience: make sure to get a qualified appraisal of your property value at the time of conversion from rental to personal use. I didn't do this when I converted my rental in 2018, and it became a major headache during my 2022 sale. The IRS questioned my stated value during an audit, and I had nothing concrete to back it up. I ended up having to hire a real estate expert to retroactively analyze what the property would have been worth, which cost me over $2,000 plus a lot of stress. Even with that, I still had to compromise on the value with the IRS auditor. Document everything at the time of conversion!

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NebulaNinja

•8M

There's no specific IRS form for documenting the FMV at conversion. The key is having strong substantiation in your records. Ideally, you'd get a formal appraisal at the time of conversion and keep that with your tax records. If you didn't get an appraisal, gather whatever evidence you can - comparable sales listings from around your conversion date, property tax assessments, insurance valuations, or even photos showing the condition of the property. The goal is having documentation created at or near the time of conversion, not something produced years later when you're selling.

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