Can you claim a capital loss on a rental property?
Capital losses from an asset can be used to offset capital gains from the sale of another asset and can be used as a deduction from normal income, with unused capital losses being carried over to future years. Losses from the sale of a personal residence are not deductible. Generally, you can only claim tax losses for the sale of properties that are used for business or investment purposes. Unfortunately, for us creative business people, we cannot sell our main residence at a loss and take advantage of the tax deduction benefits.
The reason why? The tax authority does not count tax gains from the sale of your personal residence in profit. That would be cute, wouldn’t it?). Whether you have stocks, bonds, ETFs, cryptocurrency, rental income, or other investments, TurboTax Premier has it all. In order to alleviate the pain, losses from the sale of rental properties are usually treated in a tax-friendly way.
If your rental activity does not rise to the level of a trade or business but is held for investment or use in a charitable activity, the loss is a loss of capital. If you sold investment property at a loss, you can probably deduct that specific loss from your annual tax obligations. The cost basis for a converted property is the lower of the purchase price or market value than it was converted into a rent. You can generally only deduct these passive losses from passive income that may come from other activities such as renting or other passive business activities.
However, if you convert a personal residence into a rental property and then sell it for less than the initial cost, will you have a deductible loss? -Maybe. If you converted a personal residence into a rental property and then sold the property at a loss, you may still have a deductible loss. Management decisions include approving new tenants, deciding on rental terms, approving expenses, or other similar decisions. The tax base of the rental property is the lower of the cost or value when it is put into operation, plus any improvements less any depreciation.
But here’s the best part of it: you could take back your loss for two years and get the refunds for the two years you paid taxes if your loss is large enough to reduce current income to zero. Your profit is initially taxed at a normal income tax rate of up to 25% to reclaim your depreciation costs that you’ve incurred over the years, and the rest is taxed at a lower long-term capital gains tax rate. Although the profit from the sale of a rental property may need to be reported as capital gains, losses from the sale of rental properties are deductible from your ordinary income. You normally transfer the loss as an ordinary loss on line 4 of Schedule 1 and attach it to Form 1040, U.
While losing money can be a setback for your investment portfolio, it also opens up the opportunity for you to profit from those losses to reduce your tax liability.