Tax Consequences of Losing Money When Selling a House
When you purchase a home, you expect it to be an investment that will increase in value over time. If the real estate market falls, however, it's difficult to sell your house for the same amount you paid. Unfortunately, even if you lose money on the sale of your home, few taxpayers qualify to deduct such losses.
Determining a Loss
To determine if you sold your property at a loss, you must calculate the home's adjusted basis. The adjusted basis is the amount you have invested in the home, which includes the price you paid for it plus any improvements you made. If the sale price of the home less any selling expenses is less than your adjusted basis, then you have incurred a loss on the sale of the property.
Deducting a Loss
A loss on the sale of your principal residence is not tax deductible. However, if you used the home as business property, you can include the full amount of the loss on Schedule D with any other capital losses or gains you incurred during the year. If, after totaling your losses and gains, you have a net capital loss, you can deduct up to $3,000 of the loss from your taxable income.
Partial Business Use
If you used your home for business only part of the time, you might be able to deduct a portion of the loss you incurred on its sale. For example, if you rented an apartment that was attached to your home, you would qualify to deduct the portion of the loss you incurred on the sale of the apartment. To determine how much you can deduct, divide the square footage of your home that you used for business by the total square footage and multiply by the amount of the loss.
Though losses on the sale of your principal residence are usually nondeductible, you might be able to exclude up to $500,000 in capital gains if you sell the house for more than your adjusted basis. If you incur a gain on a home that you used for business, however, you won't be able to exclude any of the gain, but you might be able to reduce it if you incurred other capital losses during the year.
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.