Are Losses on the Sale of a Home Tax Deductible?
I recently covered situations in which you’d have to pay real estate capital gains taxes, which prompted a few people to ask me about real estate capital losses.
The basic question is “If you have to pay taxes on capital gains from the sale of property in certain situations, are there also situations in which you can claim real estate losses as a tax deduction?”. To answer that question, let’s first look at equity investments versus real estate.
Real Estate Gains vs. Capital Losses: The Same as Investments?
A capital gain on the sale of a home is essentially selling your home for more than you bought it for. A real estate capital loss is selling your home for less than what you originally bought it for.
With equity investments (stocks, mutual funds, etc.) you are able to deduct your capital losses from your taxable income and you must pay capital gains taxes when you make gains on your sale. However, the same rules do not apply to gains and losses on the sale of primary or secondary residences.
Are Losses on a Home Sale Tax Deductible?
According to the IRS Publication 523, “A loss on the sale of a home is not tax deductible”. Check out page 5 of the publication for more specifics. Unfortunately, for anyone who was seeking a silver lining when selling their home for a loss over the past few years, it won’t come in the form of a tax deduction.
Losses on Investment Properties
There is an exception. If you sell an investment property for a loss, your loss may be deductible against your income. Investment properties are treated very similar to equity investments in this regard. You will need to fill out IRS form 4797 in order to claim your losses.
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This only applies to a loss on your primary or secondary residence. You can deduct the loss on a rental property. Use form 4797.
@ Natalie, you are correct. I should have included that in my original post and will amend it.
Thnx for the info. What constitutes and investment prop? I have a vacation prop that is an investment mix use as it’s rented out for half the year.
Can I deduct on this prop?
Thnx
@ Samurai – here’s a good article that should help with your question: http://www.hrblock.com/taxes/tax_tips/tax_planning/second_home.html
Hopefully you’ve been paying taxes on the income. Otherwise, forget about it.
Sounds good. I’ve definitely been paying taxes. The prop is in a rental program and there’s a official income report that goes to the IRS.
Owning a 2nd home is quite a luxury, and it’ll be good to take educate myself about all the various tax options. Thnx for reminder.
@ Samurai – yeah… this might be one of those times where you would actually want to hire out a tax pro for a year to file your return so that you can pick their brain on all of the tax rules around second homes.
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