All Forum Posts by: Nicholas Aiola

@Jenning Y. Yes to both. Passive losses can offset the gains from the entire disposition of a passive activity (e.g., sale of a rental property) regardless of MAGI.

@Wesley Myers It will likely be added to the property's basis and depreciated over 27.5 years beginning on the in-service date in 2021.

@Eric Phillips This situation is too convoluted to offer any kind of specific reply but, generally, a step-up in basis wipes out prior depreciation (and avoids recapture), and depreciation restarts with the new stepped-up value. However, there are different step-up rules for community property and the trust and nonresident factors in your friend's situation complicate the matter.

Either way, I would recommend an appraisal.

@Justin Phillip Yes, 1099s should be filed in 2020 and the deductions will be reported in the year of sale (2021).

@Dmitriy Fomichenko Sure, there's nothing stopping you from doing that proactively. However, some would argue that immediately converting to Roth after the contribution to the Traditional could be considered a step transaction. You'll want to look into the step transaction doctrine.

@Padric Lynch Remember, in service = ready and available. If it's advertised now that it won't be available until April, it won't be in service until April.

@K Luu

What @Dmitriy Fomichenko said is correct.

Thanks for the mention @Nancy Bachety !

@Padric Lynch As Nancy mentioned, expenses after the in-service date - when it is ready (livable) and available (advertised for rent) - are deductible as operating expenses; expenses leading up to the in-service date will likely be capitalized and added to basis.

You'll want to make sure you and your CPA are on the same page when filing your tax returns so as to avoid any misclassifications.

Thanks, @Bill Hampton and @Michael Plaks !

@Sandy Metivier @Dave Foster

As Dave referred to, there are safe harbors outlined in Rev. Proc. 2008-16 - see Section 4.02(1) (bolded for emphasis):

(1) Relinquished property. A dwelling unit that a taxpayer intends to be relinquished property in a § 1031 exchange qualifies as property held for productive use in a trade or business or for investment if:

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the “qualifying use period”); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period
begins (and begins 12 months prior to that day). 

It is also important to note the paragraph just before - Section 4.01 (bolded for emphasis):

.01 In general. The Service will not challenge whether a dwelling unit as defined in section 3.02 of this revenue procedure qualifies under § 1031 as property held for productive use in a trade or business or for investment if the qualifying use standards in section 4.02 of this revenue procedure are met for the dwelling unit.

It's important to keep in mind that "personal use" also includes family, friends, or anyone else who did not pay FMV rent to stay there; if they paid FMV rent, their stay(s) would not be considered personal use.