tax implications on sale of rental (Atlanta: hardwood floors, real estate market, insurance)

[bcampbel72]

My wife had a home she purchased in downtown Atlanta for $135000. Over the course of 3 years she lived in the house (before we were married) and we spent about $20000 upgrading the house. Those upgrades included HardiPlank siding, new porch, new kitchen, hardwood floors, completely new bathroom, all new windows, and backyard patio. All are, to my understanding, considered capital improvements. After 3 years, we married and converted the property to a rental. We lost money for 4 years on the rental and finally sold it for $170000. I was under the assumption that the new basis for the house should be around $155000 due the the upgrades we did while it was her primary residence, but the tax "professional" we used went back to the $135000 purchase price as the basis. Are we we off the mark here or was the "professional" and actual professional who knew what she was talking about?

[ellie]

I must be really, really bored. See line 2, box "f". Actually, all of line 2 is relevant.

http://www.irs.gov/pub/irs-pdf/f4797.pdf

[bellhead]

Originally Posted by bcampbel72

My wife had a home she purchased in downtown Atlanta for $135000. Over the course of 3 years she lived in the house (before we were married) and we spent about $20000 upgrading the house. Those upgrades included HardiPlank siding, new porch, new kitchen, hardwood floors, completely new bathroom, all new windows, and backyard patio. All are, to my understanding, considered capital improvements. After 3 years, we married and converted the property to a rental. We lost money for 4 years on the rental and finally sold it for $170000. I was under the assumption that the new basis for the house should be around $155000 due the the upgrades we did while it was her primary residence, but the tax "professional" we used went back to the $135000 purchase price as the basis. Are we we off the mark here or was the "professional" and actual professional who knew what she was talking about?

Did you claim it as a rental on your taxes and takes the depreciation and loss each year from it?

[B Wagner]

Here is a recent article from Ilyse Glink about rental tax implications. Hope this answers some of your questions.

Renting underwater home has tax implications

Q: I just received a 1099 for income I received from renting my townhouse. This income is less than the mortgage payments I paid. How do I file this on my federal and state income taxes? By the way, I had no choice but to rent the property because I am underwater. I owe $20,000 more than what the property is worth.
A: We've been hearing a lot about how the real estate market has
improved all over the country. Unfortunately, there are still millions of homeowners who, like you, are either truly underwater with their mortgages or are what is known as "functionally" underwater, where the property is worth about the mortgage amount, but the homeowner would have to bring a check to the closing due to the costs of closing.
Bill Nemeth, an enrolled agent and partner in the Atlanta-based Tax Audit Guardian, notes that the 1099-MISC form you were sent has an entry in Box 1, Rents.
When filling out your tax return, you would put the income from Box 1 and the expenses of the rental property Schedule E. Nemeth notes that adding this rental property to your tax return may provide a tax benefit to you by reducing your taxable income because you're offsetting your income (the rent) with your expenses.
"Investment property expenses might include the mortgage interest paid, real estate property taxes, casualty insurance, association fees, utilities (including gas, electricity, water, sewer and garbage pick-up), any repairs the owner made to the property, the auto mileage the owner drove to pick up rent check and check on the property), and other expenses like that," Nemeth noted.
He also added that owners of investment property can deduct depreciation. The purchase price of the property is depreciated over 27.5 years, or 3.636 percent per year.
"Your depreciation calculation is based on the value of the property when you put it into rental use (it is the lower of the cost to purchase the property or the fair market value). Since the property is underwater, it is likely that your depreciation will be based upon the current market value when you converted it to a rental," he added.
Depending upon your filing status and income, you may be able to lower your taxes this year and every year going forward by using those expenses and the depreciation. However, in some cases if your losses are too high, your tax situation may not allow you to fully benefit from all of the losses and expenses that come from the property.
In any case, the bad news, Nemeth said, is that you will have to recapture (pay back) any depreciation benefits you may get over the years when you sell the property in the future. An enrolled agent, certified public accountant (CPA) or tax preparer can provide more information.
For more details, download IRS Publication 550, Investment and Expenses from the IRS.gov website.
Ilyce Glink