All Forum Posts by: Abhishek Maloo

What I heard is - “recapturing depreciation” needs to happen at ordinary income rate while “passive loss can only be offset for passive gain”(gain is at long term capital gain rate). Since - Ordinary income tax rate > long term capital gain rate (I am in top bracket of tax) - I am confused about amending the prior returns to adjust depreciation and only carry forward the pure loss(4K) without deprecation.
 
ex - I have 25k gross loss. When I sell my property I would need to show 21k as ordinary income(recapturing depreciation) and then I can reduce 25k out of the gains.  Reducing 25k out of gains + adding 21k as ordinary income will produce atleast 17% extra tax liability for me for 21k of tax recapture considering 20% capital tax gain rate and 37% ordinary income marginal tax bracket.

Hello All,

I converted my primary residence where I lived for the last 4 years to rental property in the year 2021. While filing taxes for 2021 - I claimed depreciation on my property which amounted to 21,000$. My expenses were anyways more than the rental incomes (credit goes to cash flow negative silicon valley property) without considering depreciation. I realized now that I should not have claimed any depreciation since it did not help in lowering my taxes instead I am carrying forward the passive loss (exactly equal to the depreciation I claimed). 

Fast forward today, I am selling this property and planning to claim the "primary residence tax deduction" (upto 500k of profit tax-free) in my next year's tax return. I heard that I would need to "recapture the depreciation" if I want to claim the primary residence tax deduction on the potential profit of property sale. 

I am looking for advice whether - 

a) should I amend my 2021 tax return and remove the depreciation from it?

or 

b) Would I be able to apply the passive loss I claimed on my 2021 tax return for rental property passive loss to the profit I would make in this property sale in my future 2022 tax return?

Thanks in advance,

AB

@Jean H. - in my case - the buyers have lost the motivation to buy the house. I could have given them 1 month of extension if they want to change lender or something. Since they have sent me the cancellation - can I not put my house back in the market and hold their EMD till my home sells(to figure out the losses).

Can the buyer still put a lien on my title even if they have no intention to buy it ? 

@Allan C. - I just want to make sure that the backing-out buyer provides me assurance that they will cover the negative delta (if any) via their EMD. If the property sells above or at the same price - I am fine letting the backed-out buyer free.

My losses includes - me paying extra mortgage interest and property tax for 1 more month(re-listing period). I would need to repay for “staging” since I would need it for 1 more month.

The buyer has lawyered up already and trying to get all EMD out right with the cancellation request.

@Dan Schwartz - yes I did prepare SPDS and prelim title report - this was provided to the buyer before they signed the contract. They are pointing out that in SPDS(disclosures) - I did not mark environmental restriction on the title (which even I was unaware of) but this info was present on prelim title report. 

@Darius Ogloza - As a motivated buyer - my inspection report came clear(no air quality issue) and the lender is ready to give you the loan - would you still cancel the contract ? 

I spoke a to a bunch of realtors and nobody (0% of them) ever saw a contract being cancelled for environment restriction(whose results even came negative). 

Can you not read that buyer wants to come out of the contract by using anything at his disposal. To be honest - I don’t want to sell my beloved home to someone who does not want it. However I feel I should be compensated for my losses atleast. 

I would love to solve this matter informally, however buyer has already lawyered up. I would need to pay a lawyer to represent my side. 

@Darius Ogloza - thanks for the explanation. Buyer has informed us of them seeking legal counsel. I would certainly lawyer up. 

There is a reason why contingencies like “inspection” or “loan” exist. Waiving all contingencies without doing the due diligence is also not correct. Expecting seller to read 100s of pages of title report before filling the disclosures is also not practical - specially when the seller is providing “prelim title report” with disclosures upfront. 

My practical worry is - if this gets to mediation/arbitration - what I have heard is - only lawyers make money not buyer or seller. 

@Darius Ogloza - is this not a general practice for the seller to disclose what he knows from his best knowledge on the disclosure forms ? If the information about environmental restriction would have discovered without it being in prelim title - I could buy buyer’s reason to back out. What is so unique about this situation ? Buyer is trying to come out of a non-contingent offer using “failure to disclose” - which he cannot prove me guilty on. On top of it - the air quality report came totally fine. 

Buyer is trying to prove that I should have known about it and should have marked it in disclosure by saying - there were some flyers sent to every household in their mails in 2021. I have been renting this place for last 1 year - which I can prove by showing renter’s utility bills, lease aggrements and rental payments. I am very confident that I can prove my innocence of not knowing about this restriction very easily. 

However - I am worried about the house staying on market for long and me loosing money everyday. 

@Theresa Harris - I have confirmed with my realtor that the environmental restriction was mentioned in prelim title report which was shared along with disclosures. What buyer is using to get out of contract scot-free is “failure to disclose” - my disclosure statement does not check mark the environmental restriction on the title (which I was honestly unaware of while filling disclosures). However title report had this covered. 

My agent is advising to put the home back on the market (I should accept the cancellation) and fight for EMD on the side. contract's end date is this coming Wednesday.

thanks for the response folks. 

@zachary - Buyer(first time home owner) is having cold feet and they want to get themselves out. The fact that they sent the cancellation without even waiting for the inspection report to arrive clears that. 
@Darius Ogloza - I am a software engineer by profession and I am selling my primary home.  I never got the chance (or felt the need) to read the prelim title report. Neither my listing agent or buyers agent brought this up before getting into contract. I bought this home and then refinanced it 3 times - never the lender raised the issue of environmental restriction besides this time. I got to know about restriction once buyer’s lender asked for “indoor air quality report” on day 26 of the selling transaction. 

@Charlie MacPherson - EMD is 53k. I doubt I can resolve it in small Claims court. My contract is a regular California contract.