If you sold rental or investment real estate at a loss, you might 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.
What Is 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 any room additions, 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 that you can claim when you go to file your taxes for the year. 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 might be lower than you think. A property swap is when you exchange one property for another. This federal tax code provision, Section 1031k, allows for the deferment of unlimited capital gains if you buy a "like kind" investment property within six months. 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.
If you converted a personal residence into a rental property and then sold the property at a loss, you might 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 can 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.
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