# Conversion of Personal Use Property

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*