This article has been updated for the 2022 & 2023 tax years. I previously 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, can you claim real estate losses as a tax deduction as well?”. 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 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,
If the number is negative (adjusted basis is greater than amount realized), you sold your home at a loss. You can’t deduct this loss.
Unfortunately, for anyone who was seeking a silver lining when selling their home for a loss over the past few years (primary or secondary), it won’t come in the form of a tax deduction. There is one exception, however…
Capital Losses on Investment Properties (Business Properties) Tax Deduction
There is an exception. If you sell an investment property or business 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.