What happens when you sell rental property at a loss?
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. In other words, if you lived on the property before you officially reported it to the IRS as a rental property and the home lost value before it was converted, it might not be considered a tax loss. Learn more about the different types of taxable income on the Internal Revenue Service (IRS) website about capital gains and losses.
The example above is simplified and calculating an actual loss of rental property can be much more complicated. As long as you’ve categorized your rental property as such, you should be able to take advantage of this advantage. In the eyes of the government, investment properties are second — or third, fourth, etc. — homes that you’ve bought to rent out or repair profitably and sell for profit. Any depreciation claimed in previous tax returns for this property must be recovered when the property is sold.
Selling costs often include real estate agent commissions, advertising costs, transfer taxes, and booking fees. If you sell a rental property with locked PALs, you may be able to deduct them from sale in addition to deducting any Section 1231 losses. 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. As always, consult a tax advisor for advice that is tailored to your own rental property situation.
Let’s say you expect a tax loss from selling a rental property that you have owned for more than a year. Report the loss on Form 8949, Sales and Other Disposals of Capital Assets in Part I (if the transaction is short-term) or Part II (if the transaction is long-term). You may see a loss if you need to sell a rental property in a declining market or simply need to invest more money in a property than it’s worth. There are several deductions that can be claimed specifically when selling a rental property, including transaction costs of the sale such as brokerage commissions, property fees, advertising fees, etc.
Originally, the couple planned to hold the home for several years with the aim of generating passive rental income and Hopefully sell it profitably.