Tax Breaks for the Loss on the Sale of a Home
- The IRS does, however, allow a deduction for losses incurred on investment properties. If you have not yet sold your home, you may be able to convert your home to a rental property. This will allow you to claim future losses on your income tax return.
- To begin conversion of your primary residence to an investment property, you must make it clear that the home is no longer your permanent residence. All personal items should be removed from the home, and your address should be changed with your employer and on your driver’s license.
- After you assess an appropriate rental cost for the property, advertise the property for rent. The IRS requires that a tenant actively rent the home for at least two years before you are eligible to take a deduction. If you are planning to move some distance away from the property, you may want to consider hiring a property manager to handle leasing the property and collecting rent.
- While you are renting the home as an investment property, deduct depreciation, utility costs and other expenses on Schedule E of IRS Form 1040. The amount you can deduct is determined by your basis in the property, the recovery period for the property and the depreciation used.
- After two years as an active rental property, you are entitled to claim any loss when you sell the property. Your adjusted basis is the property value as of the date you converted the house into rental property, plus the cost of any improvements less depreciation. The allowable loss amount is the adjusted basis less the selling price of the property. Any gain must also be reported and is taxable.
Gains and losses on the sale are reported on Schedule D of IRS Form 1040. Like any other capital gain or loss transaction, the maximum amount of capital loss you may claim per tax year is limited by the IRS to the greater of your capital gains or $3,000. However, you may carry forward any remaining loss into future tax years until the entire loss has been deducted.