Thanks in advance for your response. Much appreciated. Happy holidays.
Another question, does the depreciation is calculated from the time when house became a rental property or I need to include depreciation during the years it was my primary resident also?
Based on my internet research, profit is calculated on the sale price minus adjusted basis, not the amount you originally paid for the property. Adjusted basis is the original purchase price, minus the cost of any improvements to the property, plus the accrued depreciation on the property. If this is true, I believe I don’t need to pay any tax when I sell the house, but just wanted to make sure.
My question is, do I have to pay any tax of the amount I will have after I pay of the remaining loan amount when I sell the house.
Ihave a house I purchased during the boom in 2006. We lived there until end of 2015. I rented the property at the beginning of 2016. I want to sell the house after the lease is over next year. House is not under water i.e. loan amount is less than the market value. However, market value of the house is substantially less than price I paid.
I think you have the calculation for adjusted basis incorrect..
It is purchase price + improvements - accumulated depreciation.
example if you purchased a home for $100,000 and made improvements of $50,000 and had depreciation of $10,000; your adjusted basis is $140,000 calculated as $100,000+50,000-10,0000.
Another thing to factor in is that you lived in the home for 2 out of the last 5 years. You may be entitled to exclude a portion of the gain(if any).
So your next step is to
1) calculate what your adjusted basis is;
2) estimate market value/selling price
3) see if any portion of gain is excluded(depreciation recapture cant be excluded).
4) calculate gain/loss.
You may want to speak with an accountant to get an exact answer specific to your situation.
If you sell a rental property at a loss - you can potentially use that loss to offset your other income.
There are actually a number of complicated issues in your situation. I would recommend meeting with a CPA.
When you convert the property from personal use to rental, your basis for depreciation is the lower of your basis or fair market value at the time you convert the use. See Pub 527 pg 15 bottom right.
This could actually cause you to have a gain on for tax purposes even though you would have a loss during the entire time you own it.