Determine the realized and recognized gain or loss and the character of the gain or loss

Emelio and Charita own a rental house. Charita acquired the house from her former husband in 2004 as part of their divorce settlement. Charita and her former husband paid $50,000 for the house (which is her basis in the property) in 1997. Charita estimates that the property increased in value to $80,000 ($70,000 for the house, $10,000 for the land) when it was converted to rental property in October 2005.

Rental House: The basis of property received in a divorce is equal to the adjusted basis of the property. Therefore, the adjusted basis is $50,000 for Charita as a personal residence. At the date of conversion to business use, the basis is the lesser of the adjusted basis ($50,000) or the fair market value of the property ($80,000). The basis of the land and the building must be determined separately:

Land = ($10,000 / $80,000) * $50,000 = $6,252

Building = ($70,000 / $80,000) * $50,000 = $43,750

Asset: Rental House

Date acquired: October 1, 2003

Initial basis: $50,000

Depreciation/Amortization life: 27.5 yrs.

Depreciation/Amortization deducted to December 31, 2013: $13,058

(per the schedule here)

Basis on December 31, 2013: $36,940

Depreciation/Amortization Schedule:

Year Depreciable Basis Depreciation Percentage Depreciation

2003 43,750 0.758% 332

2004 43,750 3.636% 1,591

2005 43,750 3.636% 1,591

2006 43,750 3.636% 1,591

2007 43,750 3.636% 1,591

2008 43,750 3.636% 1,591

2009 43,750 3.636% 1,591

2010 43,750 3.636% 1,591

2011 43,750 3.636% 1,591

The real estate market begins to deteriorate in 2014. Emelio and Charita decide to sell their rental house before it loses any more value. They sell the house for $76,000 on October 16, 2014. They pay $325 to advertise the property for sale. In addition, they pay $5,200 in brokerage commissions and $1,045 in legal fees on the sale. Because their renters had a one-year rental agreement, Emelio and Charita have to pay the renters $900 to vacate the lease.