Income Tax Deductions on Selling Properties at a Loss

By: Amanda McMullen

When you sell real property, you will typically incur a gain or loss. If the selling price of the property minus expenses exceeds the amount you had invested in it, you have realized a gain. Conversely, if the selling price minus expenses is less than the amount you had invested, you have incurred a loss. Losses may or may not be deductible, depending on the type of property sold.

Types of Losses

If the property you sold was a main home or second home that didn't generate income, you have a loss on personal property. If you incurred a loss on property you used for business purposes, whether it was an office building or a rental home, you have a business loss. If you incurred a business loss on property that you owned for less than one year, you have a capital business loss. If you owned the property for more than one year, you have an ordinary business loss.

Personal Losses

Personal losses on the sale of your principal residence or other personal use home are not deductible under any circumstances. However, if you had a gain on the sale of personal real estate, you could exclude up to $500,000 from your taxable income if you are married filing jointly or up to $250,000 if you are married filing separately or single.

Business Losses

If you have an ordinary business loss, you can deduct the full amount directly from your taxable income for the year. If you have a capital business loss, you can't deduct it directly from your overall taxable income or even from your business income. However, you can use it to decrease your capital gains for the year. Furthermore, you can deduct up to $3,000 of net capital losses from your taxable income if you are married filing jointly or $1,500 if you are single or married filing separately.

Excess Losses

If you incur a large capital loss on the sale of business property and your net capital loss exceeds $3,000, you can carry the excess amount over to the next tax year and use it to reduce future capital gains. If an ordinary loss from the sale of property exceeds your taxable income for the year, you have a net operating loss, which you can carry forward for up to 20 years to reduce your taxable income.


About the Author

Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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