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How do you calculate capital loss on rental property?

Posted by jcbrosse2 on December 18, 2021

Calculating your capital loss is relatively easy. Subtract your cost base that you paid for the property plus the cost of capital improvements you made while you owned it from your sale price after you’ve completed the costs and commissions. If your property is sold for less than the purchase price, you will have a capital loss. A capital loss can be deducted from capital gains for the current year.

If you do not make any profits in the current year, you can attribute a capital loss in the current year to one of the previous three years if you had shown capital gains in your tax return. Otherwise, you can prefer capital losses indefinitely to use them against future capital gains. According to subsection 45 (of the Income Tax Act), it is possible to treat a primary residence that has been converted into a rental property as a primary residence for up to four years. You normally transfer the loss as an ordinary loss on line 4 of Schedule 1 and attach it to Form 1040, U.

If the house lost value before converting it into a rental property, you may have a low base and no tax loss. Just over a year ago, Ted and Alice bought a fixer tenement house that needed a new roof and HVAC system. It’s probably safe to say that most real estate investors don’t buy a rental property with the aim of selling at a loss. Additionally, an investor can make a strategic decision to sell a below-average property at a loss to offset capital gains from another investment.

Rental properties are income-generating properties. If you are in the real estate rental trade or business, report the loss when selling rental properties on Form 4797, Commercial Property Sales. In your case, Chris, these wouldn’t apply because your adjusted cost base would only be fair value if you converted your home from a primary residence to a rental property. If you’ve had a rental property for more than a year and you sell it at a profit, your profit will be taxed at two different tax rates. Thus, each year the property is held, 3.636% of the cost base can be deducted as depreciation expense from the net income of the rental property before tax.

Death, divorce, or a change in investment strategy are three of the reasons why an investor can decide to sell a rental property at a loss. 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. Ted and Alice list the rental properties for sale on the Roofstock Marketplace — the number one marketplace for buying and selling investment properties — and quickly receive an offer from another investor. Unfortunately, their plans have changed, and now Ted and Alice are getting divorced and have to sell the rental property quickly.

So before you consider selling your property, please contact a CPA who is familiar with rental and investment properties. Let’s say you expect a tax loss from selling a rental property that you have owned for more than a year.


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