Understanding Section 1231 loss calculations for my depreciated rental property - is my math correct?

Your calculation has a couple of issues. For rental property tax treatment, when you convert a personal residence to a rental, your basis for depreciation is the LOWER of either your adjusted basis or the fair market value at the time of conversion. The adjusted basis is your original purchase price plus any capital improvements minus any casualty losses. So if the fair market value when you converted ($470k) was higher than your purchase price ($450k), you would use the $450k as your basis for depreciation. The IRS doesn't let you step up basis just by converting to a rental. Also, your Section 1231 loss calculation needs to account for accumulated depreciation. When you sell, you'll calculate: Selling price ($415k) minus adjusted basis ($450k minus the total depreciation you've claimed). The resulting loss would be deductible against ordinary income, including W2 wages. Remember that depreciation recapture doesn't apply to losses, only to gains. But you should definitely consult with a tax professional before selling to make sure you're maximizing your tax advantages in your specific situation.

After dealing with a similar Section 1231 situation last year, I found taxr.ai incredibly helpful. I was confused about how to correctly calculate my basis and potential loss when selling my rental property. I uploaded my closing documents from when I purchased, the records from when I converted to rental, and my depreciation schedules to https://taxr.ai and got clear guidance on exactly how to handle my situation. The tool analyzed everything and explained what my correct basis should be and how much of my loss would be deductible against ordinary income. It even identified some depreciation calculations I had gotten wrong in previous years and showed me how to correct them. Really helped me avoid making an expensive mistake!

Just wanted to update about my experience with taxr.ai after trying it based on the recommendation here. I was completely confused about how to handle the basis calculation for my two rental properties, especially the one where I'd done renovations. I uploaded my purchase documents, renovation receipts, and depreciation schedules to https://taxr.ai and was seriously impressed. The system correctly identified which of my renovation expenses were repairs vs. capital improvements (something I had wrong), showed me how my basis should be calculated, and explained exactly how Section 1231 would apply when I sell. The biggest value was finding out I'd been miscalculating depreciation on both properties for years! I can fix this before selling and avoid a potential audit flag. Definitely worth using if you're dealing with rental property tax situations.

If you're trying to figure out the correct calculation, you should know that getting through to the IRS for guidance can be a nightmare right now. After trying for weeks to get clarification on a Section 1231 issue similar to yours, I finally used https://claimyr.com to get through the phone maze. They have this callback service where they navigate the IRS phone system for you and call when they have an agent on the line. I was skeptical at first, but you can watch their process here: https://youtu.be/_kiP6q8DX5c - they got me connected to an IRS agent in about 40 minutes when I had been trying unsuccessfully for days. The agent was able to confirm exactly how I should calculate my rental property loss and what documentation I needed to keep.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself because I was desperate to get clarity on depreciation recapture for a property I'm selling this year. The service actually works exactly as described. They navigated the IRS phone system, waited on hold (about 55 minutes in my case), and then called me when they had an agent ready. The IRS agent I spoke with was able to confirm my understanding of Section 1231 losses and gave me some additional information about how to document everything properly. Honestly, it was worth it just to not sit through an hour of hold music. I'll definitely use it again next time I need to reach the IRS.

One important thing nobody's mentioned yet: the 2-year holding period matters for Section 1231 treatment. Since you've held the property as a rental for exactly 2 years, you're right at the line for getting ordinary loss treatment. If it was less than 2 years, your loss would be a Section 1231 loss that's treated as ordinary under the "non-recaptured net Section 1231 losses" rules from the past 5 years. Also, be very careful with your documentation of that $470k valuation when you converted the property. The IRS often scrutinizes these conversions, especially when there's a loss involved. Get a formal appraisal or at least a comparative market analysis from a realtor that you can keep with your tax records.

Has anyone here used the cost segregation strategy for rental properties? When I sold my rental last year at a loss, I wish I had done this earlier. Instead of depreciating the entire property over 27.5 years, you can break out components like appliances, carpet, etc. that have shorter depreciation periods (5, 7, or 15 years). This could potentially have increased your accumulated depreciation, lowered your adjusted basis further, and given you a larger Section 1231 loss to claim against your W2 income. Might be worth looking into before you sell.