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DEFRAYING FINANCIAL LOSS ON A HOME SALE -- CONVERT TO A RENTAL

 WASHINGTON, June 25 /PRNewswire/ -- Consumers who face potential losses when selling their home can lessen the financial pinch by converting a personal residence to a rental property, according to an article in the June issue of Real Estate Today, published by the National Association of Realtors.
 "Smart Tax Moves For Tough Times," shows home owners how to diminish potential losses when selling a property in areas with declining home values. Under Internal Revenue Service Rules, the loss on the sale of a personal residence is not deductible, but since the loss on the sale of an income-producing property is deductible, home owners choosing to convert their property to a rental should first understand the appropriate IRS rules.
 Author Donald J. Valachi, a Realtor in Woodland Hills, Calif., writes, "First and foremost, in order for the loss to be allowed, home owners must have profit in mind." Valachi summarizes various tax court decisions that provide guidelines to home owners seeking to establish a profit motive:
 -- The home owners must rent the property in a transaction where both the owners and renters have their own interests at heart. If home owners rent to a family member and are subsequently audited, the IRS will expect to see that the same price and terms would have been provided to any other renter.
 -- The property must be rented at a fair market price, consistent with similar rentals in the area.
 -- Before selling, the owner cannot reoccupy either part or all of the home once it is rented.
 The article adds that the length of time the home is rented does not appear to be a factor, just as long as it is actually rented. However, Valachi emphasizes that in order to establish the fair market value, an independent appraisal should be done at the time the property is converted to a rental. This figure is important when the decision is made to sell the rental property.
 The loss on the sale of a property that has been converted to a rental is based on a variety of home value calculations, including:
 -- "Amount realized" -- the purchase price of a home, minus any expenses incurred by the seller, such as a real estate commission or attorney's fee;
 -- "Fair market value" -- the home's value based on an independent, professional appraisal related to current market conditions;
 -- "Original basis" -- the original purchase price paid for a home, plus certain closing costs;
 -- "Adjusted basis" -- the original basis, plus adjustments made to the home during the period of ownership. Adjustments can either increase or decrease the value of a home.
 Examples of adjustments that generally increase the basis of a home are additions or restorations after damage. An adjustment that generally decreases the basis is a gain from the sale of an old home on which tax was postponed.
 Typically, a loss on a home sale would be the difference between the adjusted basis of the home and the amount realized from a sale. However, when a home has been converted to a rental under proper IRS guidelines, the loss is calculated using the lesser amount of two values -- either the basis of the home at the time of conversion, or the fair market value. That lesser value is then contrasted with the amount realized to form the adjusted basis for deductibility. The final figure for deductible loss is determined by taking the adjusted basis, and subtracting the depreciation incurred over the rental period.
 Therefore, if the market is so slow that the property would not have many interested buyers for an extended period of time, deductibility can be maximized while rental income offsets further loss. Also, in areas experiencing a better rental market than sales market, converting a private residence to a rental property before selling may be a wise investment.
 Valachi cautions that home owners should consider real estate variables such as finding tenants and managing the property before choosing this course of action. He recommends getting the advice of an experienced financial professional such as a Certified Public Accountant before moving forward.
 The National Association of Realtors, "The Voice for Real Estate," is the nation's largest trade association, representing nearly 750,000 members involved in all aspects of the real estate industry.
 -0- 6/25/93
 /CONTACT: Scott Sherwood, 202-383-1016; Cheryl Spector, 202-383-1289; or Trisha Morris, 202-383-7560, all of the National Association of Realtors/


CO: National Association of Realtors ST: District of Columbia IN: FIN CST SU: EXE

IH-KD -- DC004 -- 5607 06/25/93 08:48 EDT
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Date:Jun 25, 1993
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