Legal Question in Tax Law in New York

Re: Capital Gains?

This is a complicated question, but I will try to be brief. Since the property is no longer your primary residence, and you indicated that you reported it in your personal returns as a rental, you have opened a can of worms. You may have missed the opportunity to report the sale as the sale of a personal residence, which may have entitled you defer any gain and the taxes on the gain. By converting, per your 2005 returns, the property to a rental property, you have created the exposure for not only paying capital gain on the profit (presuming you sold it at a profit), but possibly ordinary income if you also took depreciation as a deduction in the 2005 returns. I suggest you speak with your accountant, if you have one, or an accountant, if you have none, on whether you can file an amendment of your 2005 return eliminating the loss, and ignoring that you declared the property as a rental in 2005. If this can be done, since you replaced one primary residence for another, you may be able to file your 2006 return in a manner preserving the avoidance of recognition of any gain from the sale. You also need to make a calculation of what are the consequences both ways (keep things as they are and the question of capital gains in 2006), and compare this result to the changes for 2005 and the impact on 2006. If you can amend the 2005 returns, and it is advantageous to do so, after making the alternative calculations, go with the best tax result. Note: This is a solely a response to an Internet question and the reply is not to be considered as legal advice or to create an attorney-client relationship.