Capital Gains and Losses

• Any property that you own can increase or decrease in value. When you sell property that has increased in value, it is known as a capital gain. When you sell property that has decreased in value, this is known as a capital loss. Typically, the Internal Revenue Service makes you pay taxes on capital gains and lets you take a deduction for capital losses. This helps you recoup some of the loss on the sale of the property.
  
  

Investment Property

• When you own property and use it as your primary residence, the Internal Revenue Service does not allow you to take a deduction when you sell it at a loss. To take a capital loss on property, you have to own it as an investment property. For example, if you have a rental property and its value declines before you sell it, the IRS will then let you take a deduction based on the loss amount.
  
  

Offsetting Capital Gains

• When you realize a capital loss, it does not necessarily provide you with the same type of tax deduction that you get from other qualified expenses. Instead, you get to reduce the amount of capital gains on which you have to pay taxes. Capital losses offset any capital gains you earned throughout the year. After the capital gains are offset, capital losses can offset up to $3,000 of other income you earn.
  
  

Carrying Forward

• If you realize a capital loss on the sale of a property, the Internal Revenue Service also allows you to carry that loss forward to future years. If you offset all of the capital gains that you have and use $3,000 to offset other income, the excess capital losses can be saved. Then when you have capital gains in the future, the IRS lets you use that capital loss to offset them.