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.
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?
@ 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.
What about a home that was inherited? I inherited a home two and a half years ago and it is now in escrow. The sale price is $25,000 less than the cost basis. It has been vacant the entire time I have owned it. Are there any tax advantages for this situation?
I purchased a property as a primary residence in Jan-2005. I moved out and rented the property out from July-2008 through Sept-2010. The property has been vacant and listed for sale since then. The cost basis is about 82K higher than the offer I have to sell it.
I have paid income tax on the rental income, so no worries on that front.
When I file my 2010 taxes, am I able to deduct this entire 82K loss against my income for 2010 (minus previous depreciation from 2008 and 2009) using form 4797 or is there a limit to the amount I am able to deduct per year?
@Diana- you can count the home as a second home. As such it is a capital asset and you can deduct up to 3k per year.
@Steve- Normally you can deduct the loss against your income. However I believe that you are limited to 25k more than income as NOL. Depending on your income you may not hit this limit. When doing your taxes don’t forget to recoup any depreciation you have taken.
As always, consult your tax professional for details as they apply to your specific situation.
My husband and I bought a condo for my dad to live in. We paid cash, so the only expenses were for taxes and condo fees. After he passed away, we sold it for a loss. Is this loss deductible?
and pulication 544 goes into detail, but basically there is no way a loss on a primary residence can help reduce your tax bill.
If it was partially used and declared for rental, the rental costs and any depreciation and changes could get included as a business activity deduction, but it is more beleivable and acceptable if you are a real estate professional. However, there are additional cases of abandonment, condemnation and other reasons that may be included in some special cases. The detail should make you seek the advice of a Tax Accountant or Tax Lawyer.
If you are considering the sale of a second residence, an investment property or a property used for business there is scope for writing off the loss agains the adjusted basis. But it is complicated if there is any loan or financing associated with it. I have a property and am a real estate professional and for another employment related reason I purchased as a secondary home a property in another state more than 50 miles away from my main home. I treated it as a relocation, but in fact the project was ending earlier and the property retained as an investment vehicle with no rental income and a still declining local real estate market so I will be selling it at a loss this current year and it will qualify as a tax deductable event in the opinions of the professionals I have spoken with, assuming the sale price is still heading downward from my purchase price, with many factors to support this treatment should it be challenged by the IRS.
I know of a new house that was built five years ago and has never sold. The builder paid cash for the land and financed the construction. That construction loan may have been converted to an actual mortgage, I don’t know. But, I’m considering offering to buy the house for the pay-off balamce of his loan. Is he entitled to a tax write-off for the property and interest he has paid to date, or any other kind of write off?
Suzie, I am currently working with Access and my mortgage company to modify my home loan. I have a mortgage of 230,000.00 and only able to work part time.Gross(3147.00 to 3882.00)Depending if I work all the hours I can. I can’t find more work. I’ve invested 26,000. currently.
Currently, I have one more payment 9/1/11 and then Access will begin pursuing a permanent modification. The payment is 898.32 and in 5 yrs it goes down 250.00. Then I have a second-not yet worked out. The loan would be at 2% for 40 yrs.
A friend watched your program and heard that there is a bill that will tax you if you sell your house at a loss in the near future?
Should I save my house?? Paige
I bought my second home in 2007 for $280,000. 2 yrs later I transferred the loan to my primary home. Now, the second home is mortgage free.
I am going to sale it at loss (about $100,000) less the original price which it was $280,000. I spent about $25,000 for renovation last November. Much more.
1. Am I going to be taxed on the sale? Let us said I sold it for $175,000.
2. Can I report the loss in my income tax for 2012?
By the way I rented and I paid tax on the income. The rent was not covering my condo fee and the mortgage of the 2nd home. I paid the difference out of my pocket over three years. Advise please.
I sold my primary home to relocate for a job. I took a 13K lost. Is that loss deductable as a relocation expense for work?
I bet this becomes even more important these days. I am an agent in Utah and there a lot of people that have to take heavy losses these days to sell. Good info. Thanks!
Sorry to comment twice, but are banks able to deduct their losses from short sales and foreclosures?
hi, Can i off set the commercial property capital gain against my primary resident loss. If not please advise…thanks
Just one more good reason to get he hell out of this country! I really fell that this country is on it’s last leg. Obama has not helped but we can thank Bill Clinton and George W. Bush. For selling out the American dream for political gain. The houses sitting vacant and pulling down our real estate values are totally their fault. As far as I can see this country is on the verge of collapse and really the sooner the better because Obama is digging the debt hole deeper every day. Goodbye America as we know it.
I sold investment land in 2014 that I purchased in 1998. I had a never claimed the interest or taxes I paid during the time I owned the property Can I add that to the purchase price when subtracting the cost in figuring the capital gains and loses? thanks
I had a second home, which was my primary residence, that I was in the process of turning into a rental property until I lost my job. I had to sell the house for a loss. Is this loss deductible? Can I use the loss to offset capital gains in stocks I have had to sell for income?