 Course:  Income Tax Planning
Lesson 15: Property Transactions

## Student Question:

Running with the last example on this page where the sale is between the
basis for a gain or a loss, is there ever a situation where factoring in depreciation would result in either a gain or loss?

### Example

Kevin’s home has been declining in value, so he has decided to move and rent it. When he converts the home to rental property, the fair market value is \$200,000, while his adjusted basis is \$250,000.

Basis for determining a loss / depreciation

Kevin’s basis for determining a loss is the lesser of the FMV, \$200,000, and the adjusted basis, \$250,000. Therefore, Kevin’s basis for determining a loss is \$200,000.

Basis for determining a gain

Kevin’s basis for determining a gain is the adjusted basis, \$250,000.

So, if Kevin sells the home three years after converting it into a rental property, and depreciates it \$8,000 in that time, what would he report if he sold the home at the following amounts?

• \$290,000: If Kevin sells the home for \$290,000, he would use the adjusted basis of \$250,000, less the \$8,000 depreciation, as his basis. Therefore, Kevin would report a gain of \$48,000 (\$290,000 – \$242,000).
• \$100,000: If Kevin sells the home for \$100,000, he would use the fair market value of \$200,000, less the \$8,000 depreciation, as his basis. Therefore, Kevin would report a loss of \$92,000 (\$100,000 – \$192,000).
• \$215,000: If Kevin sells the home for \$215,000, he would not report a gain or loss. This is because by using the basis for a gain, Kevin would have a loss of \$27,000 (\$215,000 – \$242,000) and using the basis for a loss, Kevin would have a gain of \$23,000 (\$215,000 – \$192,000).

Jay

## Instructor Response:

Good question, Jay.

We know Gain = Sales Price > Adjusted basis.

and

Loss = Sales Price < a cost factor.

• The cost factor is the lesser of fmv on conversion date or adjusted basis.

Because depreciation reduces basis to arrive at adjusted basis, depreciation is absolutely a factor.

Dan 