Tax Benefits for Losses on Property Sales

by David Rodeck, Demand Media
    You can only claim a capital loss on investment homes, not your residence.

    You can only claim a capital loss on investment homes, not your residence.

    While it's frustrating to lose money on an investment, sometimes it becomes necessary to sell property for a loss. Fortunately, there are several tax benefits you can claim after losing money on a property sale. While these tax benefits are not enough to totally erase your loss, they do create a silver lining for this unfortunate situation.

    Basis

    A property sale is considered a loss if you sell it for less than its basis. Your basis is your total investment in the property. For most assets, this is the amount you originally paid plus any transaction fees. Some assets, such as houses, can have their basis increased. If you pay for improvements or additions to your property, the property's basis is increased by these costs. Keep in mind that basis is not increased by maintenance costs. The higher your basis in a property, the better you'll do at tax time when you sell the property. This is because you'll have a higher total loss or a lower total gain.

    Investment Property

    If the property you sell is a personal investment, the loss is considered a capital loss. Capital assets are things such as stocks, bonds and investment properties. The loss from this sale will lower the tax bite on your other income. The first thing to do with a capital loss is to use it to reduce gains from other sales. If you lost $10,000 on one sale and made $10,000 on another, the two sales cancel out, meaning you don't owe any taxes for the year. If your total capital losses are higher than your capital gains for the year, you can deduct up to $3,000 in losses from your other income. If you still have losses left over, you can carry them forward to future tax returns and repeat this process until the tax benefit from the loss is all used up.

    Rental Property

    When you sell a rental property for a loss, you could be eligible for an even-more generous tax benefit. If you owned your rental property for more than one year, your loss is considered a 1231 loss by the IRS. You can use your 1231 loss as a full deduction against all your income for the year. If this knocks your income for the year below zero, you can carry the losses back against your income from the past two years and get a tax refund. If you took a real haircut on your sale and still have losses left over, they can be carried forward against your income for the next 20 years.

    Personal Residence

    One property loss that won't create any tax benefit is the sale of your personal residence. You cannot deduct this loss from your taxes in any way. This is because the IRS does not tax the gains from selling a personal residence for a profit. To balance this out, taxpayers cannot deduct the loss of a personal residence sale from their taxes. It would be like eating your cake and having it too. While selling your investment or rental property for a loss gives a tax benefit, selling your personal residence will not.

    About the Author

    David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

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