When you sell your home for less than the amount you paid for it, you incur a loss on the transaction. If you and your spouse used the home as a primary residence, you won't be able to deduct the loss from your taxable income. However, if the home qualifies as investment property, the loss is deductible.
Determining a Loss
To determine whether you have incurred a loss on the sale of your home, you must first calculate your adjusted basis in the home. In most cases, your adjusted basis is equal to the purchase price of the home modified to reflect casualty losses, depreciation and any improvements made to the property. Next, calculate your amount realized as the sale price of the home minus selling expenses. If your amount realized is less than your adjusted basis, your loss is equal to the difference between these two values.
Loss on Investment Home
If the home you sell qualifies as investment property, you can deduct the loss on your tax return. Your home qualifies as investment property only if you use it to generate income. The IRS considers a loss on the sale of investment real estate to be an ordinary loss. You can deduct 100 percent of an ordinary loss in the year it occurs.
Claiming the Deduction
To claim an ordinary loss on the sale of investment property, you must complete Form 4797. The form requires you to list all of your business sales transactions during the year. If your losses exceed your gains, you have a net ordinary loss. If you have a net ordinary loss on this form, you will include the amount on line 14 of Form 1040.
It's possible to incur a monetary loss that doesn't qualify as a loss for tax purposes. For example, if you owe more money on a home than its sale price, the transaction is a loss for you and your spouse. However, if the sale price exceeds the home's adjusted basis, the IRS still views the transaction as a gain. In such cases, you may have a taxable gain even though you didn't earn a profit on the investment.