Can I Claim a Loss on the Sale of an Investment Property?

by Herb Kirchhoff

    If you sold rental or investment real estate at a loss, you may be able to deduct that loss from your taxes. If you sold your personal residence at a loss, that loss is not deductible. For the loss on the sale to be tax deductible, the real estate had to be held to produce rental income or a capital gain. The property could not be held for personal use.

    Cost Basis

    The difference between your sale price and your cost basis determines whether you had a loss or gain on the property sale. Your cost basis is your purchase price plus improvements, such as a new roof or windows, minus depreciation and operating or repair expenses you deducted on your taxes while you owned the property.

    Losses Offset Gains

    If you sold your investment property for less than your cost basis, you have a deductible loss. You can use that loss to offset all your capital gains from other investments and up to $3,000 in income from other sources in the current year. You can carry any remaining loss forward to offset capital gains and $3,000 of other annual income in future years until the loss is used up.

    Reduction for Swaps

    If you obtained the investment property through a tax-deferred, like-kind swap, your cost basis may be lower than you think. In the case of property swaps, you must also subtract from your cost basis the amount of deferred capital gain on the property you exchanged in order to acquire the investment property you sold.

    Rental Conversion

    If you converted a personal residence into a rental property and then sold the property at a loss, you may still have a deductible loss. The cost basis for a converted property is the lesser of the purchase price or the market value when it was converted to a rental. You add in any improvements to the rental and subtract depreciation you took while you owned it. If the property was worth less than you paid for it before you converted it to a rental, you might not have a deductible loss. If the value plunged after the conversion, the loss on sale probably will be deductible.

    Photo Credits

    • Real estate board with a house illustration image by Stasys Eidiejus from Fotolia.com

    About the Author

    Herbert Kirchhoff has over 35 years experience as a newspaper and newsletter reporter, writer and editor, with 27 of those years spent on telecommunications industry policy issues. Kirchhoff has a B.A. in journalism from Rider University in New Jersey and has been published in the "Trenton (N.J.) Times" and in "Communications Daily" and State Telephone Regulation Report, Washington, D.C.

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