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What happens when you sell rental property at a loss?

Posted by jcbrosse2 on December 23, 2021

When a property is sold profitably, those gains are reported as capital gains and taxed. However, if a rental property is sold at a loss, these losses are deductible from normal income, subject to certain restrictions. If you sold rental or investment properties at a loss, you may be able to deduct that loss from your taxes. If you sold your personal residence at a loss, this loss is not deductible.

In order for the loss from the sale to be tax deductible, the properties had to be held in order to generate rental income or a capital gain. The accommodation could not be kept for personal use. Therefore, you must work with a CPA before selling assets to calculate your depreciation obligation in addition to your capital gains or loss tax position. 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. This is called a depreciation repayment, which is specific to rental properties, and the amount previously used as a depreciation deduction is taxed at a 25% recovery rate. The cost basis for a converted property is the lower of the purchase price or market value than it was converted into a rent. 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.

Although this tax-minimizing tactic primarily serves to offset profits from equity investments, more and more people are now applying them to the sale of rental properties. Be careful if you purchased the property on a Section 1031 tax-deferred exchange where you traded another property for the one you want to sell. 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. Before you try to determine how much you would lose on your rental property if you sold it, you need to determine your cost base.

The deduction amount depends on how long the property has been used as rent compared to its use as a primary residence. As discussed above, tax law is relatively friendly for real estate investors, even if there is a capital loss.


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