What Happens If My Money Is Tied Up in Real Estate and My Property Loses Value?

If the property that has lost value is your home and you are content with where you live, your best choice may be to do nothing. While your home is likely the largest single purchase you will ever make and home values have historically increased in value, you should not consider your home primarily as an investment. If you are happy with your current address, there is no reason to change. The loss is only on paper unless you decide to sell. If you continue to make your mortgage payments as agreed, you will eventually own your home free and clear.

If you are experiencing distressing financial circumstances, such as a reduction in income or an increase in your mortgage payments due to a rate increase on an adjustable rate mortgage, having property that has lost value can present a number of challenges. Contact your loan servicer as soon as possible to discuss available options. The sooner you call, the more options you might have, according to the Federal Trade Commission. You might qualify for a mortgage loan modification or payment forbearance. You might be able to recoup your investment -- or at least limit your loss -- by selling your home.

If you must sell your property at a loss, you might be able to reduce the sting when you file your federal income tax return. You can't deduct a loss on the sale of your primary residence, but you can deduct a loss on the sale of rental property. If you owned rental property for more than one year you can offset income from other sources, including salary, capital gains, self-employment income and most other forms of income, according to TurboTax.

If your property is severely underwater, and you don't have the financial resources to ride out the storm, you might consider filing for personal bankruptcy protection. Chapter 7 bankruptcy, commonly referred to as liquidation bankruptcy, will result in your property being sold by the court trustee and the proceeds used to repay your debt. You will no longer own the property, but you will no longer be obligated to pay for it. If you wish to maintain ownership of the property you might consider Chapter 13 bankruptcy. Sometimes referred to as the wage earner's plan, Chapter 13 bankruptcy allows you to keep your property while you participate in a court-administered repayment plan. There are significant and long-lasting implications involved, so you should only seek bankruptcy protection as a last resort. A bankruptcy will remain on your credit report for 10 years.