Tax Q's: Selling Rental Property at 50K loss

[Brian Morissey]

Hi,

I am considering selling my rental property which I purchased for $380k 11 years ago and currently has a market value of $330k. I am not breaking even on the rent, hence rather sell. I am married with combined yearly income of $150k+ . I have 3 questions:

1) How will a 50k loss affect my taxes if my combined income is 155k? Is it favorable or not favorable? I heard some deductions are phased out after $150k.

2) Should we hold on to the rental property that's under water (Sacramento, CA), or sell it at a loss and buy another one in another city where housing prices/rent is appreciating faster (San Jose, CA) with much higher rents? Which one is more favorable in terms of taxes?

3) Since I am selling at a loss, do I have to worry about depreciation recapture? I've used Turbotax over the years and if I model the sale of the property in Turbotax Premier, it does not show I have to pay taxes (assuming my income stays the same). In fact, Turbotax shows that I will get both a federal and state tax refund.

Thanks in advance!

Brian

[Jake Weir]

@Brian Morissey, huge disclaimer that I'm not a CPA, but can talk about long term capital losses (stocks), I've claimed in the past.  This should be similar until the depreciation part...

1) My understanding is that if you sell at a loss you can apply the loss in the following ways:

-reduce your taxable income by 3k starting with the year you sell and can carry over to future years until you completely apply the loss.  (it would be 1.5k if you were single).  I don't think your income phases the deduction out, just affects the tax rate you pay for the capital gain.

-continue to carry over what's left of the capital loss into future tax years until you had a capital gain to offset it completely (stocks, or other real estate to sell).

2)  I think you need to worry about depreciation recapture in calculating your adjusted cost basis.  This will really reduce the amount of loss you calculated, and might even show a gain.  From what I'm seeing, if you have a capital loss after factoring in the depreciation, the tax is zero.  If realize a gain, the depreciation recapture is taxed at a higher rate than the long term capital gain.

//www.irs.gov/taxtopics/tc409.html

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