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Selling Rental Real Estate at a Loss & Selling Rental Real Estate for a GAIN

If you have been a rental property owner for any length of time, you are likely concerned about the cost of that property today. Due to the real estate slump, which continues to be a problem, rental property prices have suffered greatly, as have all types of property prices. It is important for you to determine if you have a tax loss or gain, when you compare the price of your rental property to its tax basis. You can determine the tax basis in most cases by considering the original purchase price and including any improvement costs, provided they weren't already deducted as repairs or maintenance.

The bottom line is that you need to make sure of your property's tax basis before you take it to market. It is important for you to know ahead of time if you are expecting to gain or lose, as a gain may increase your tax bill.

In the event you sell the property for more than the adjusted basis, the amount that the sales price exceeds the adjusted basis would be considered a gain and be taxed at capital gains tax rates.

Also keep in mind that even though you sold a rental property, the $250K principle residence exclusion may still apply if you meet the requirements.

Favorable Tax Rules for a Tax Loss

If you're going to be selling property at a loss, it is not necessarily considered to be bad due to the tax rules in some cases. According to section 1231, any type of loss can reduce your income on your taxes. If you have had a significant income year, regardless of whether it is from capital gains, your salary, self-employment income or even bonuses, it may be possible to reduce that income on your taxes if you sell your rental property at a loss. There may even be instances in which you are able to reduce your income below zero, and this can benefit you in the current tax year as well as for subsequent tax years, if you filed properly. As a matter of fact, it may be possible for you to carry your net operating loss for up to 20 years.

Passive Activity Losses

In some cases, it may be possible to claim passive activity losses, if your rental property has been consistently generating losses in previous years. This money can be deducted from other types of passive income, including passive business opportunities and other rentals. It is possible to suspend passive activity losses and when you sell the property, you can deduct those suspended losses on your taxes. This can reduce your taxable income significantly.

Selling Your Personal Property at a Loss

If you sell your personal property at a loss, you're not going to be able to deduct that loss on your taxes. Those deductions are only made available for sales of property at a loss which is related to rental or business purposes. That doesn't mean, however, that you are without options. If it is done properly, you may be able to convert your personal residence to a rental property, selling it at the original cost which is, in essence, a loss. It is important for you to do this properly so that you are sure to get the tax benefit when filing at the end of the year.