capital loss treatments when converting a rental to a primary residence

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Submitted by anon8mizer on July 23, 2007 - 11:33pm

Hi everybody,

I have a rental unit that I plan to move into sometime in the future and convert it back to a primary residence, and sell it as a primary residence to enjoy the 250K/500K capital gain exclusion. I realize I need to own the unit for at least 5 years and live in it for at least 2 of the 5 in order to do that.

I am currently claiming depreciation on the rental unit. The unit also has a capital loss that is being carried over because the tax/interest/expenses on the unit is more than what I am collecting from rent, and unfortunately my AGI is high enough that I don't get any breaks there. So, it's being carried forward on my taxes right now.

My question is this: When I sell my rental as a primary residence, I realize that IRS will want to recapture the deprecation I claimed from when the unit was a rental... but what about the capital loss I incurred when it was a rental? Will I be able to use the loss to offset any capital gains even though at time of sale the gain will be from the sale of a primary residence, not a rental property?

Thanks for your sagacious advice.