Can I claim loss in real estate value on my taxes?

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By Stephen Fishman, J.D.
If you sell your home at a loss, can you deduct the amount from your taxes? Unfortunately, the answer is no. A loss on the sale of a personal residence is considered a nondeductible personal expense. You can only deduct losses on the sale of property used for business or investment purposes.

The only way you can obtain a deduction if you sell your home at a loss is to convert it to a rental property before you sell it. However, your deductible loss will be limited. This is because when you convert property you held for personal use to rental use your tax basis (value for tax purposes) is the lesser of the following values on the date of the conversion:

the property’s fair market value, or
the property's tax basis.
Your tax basis is basically the property's original cost, plus the cost of any improvements you've made (but not repairs), minus any depreciation deductions taken--for example, if you claimed the home office deduction. Fair market value is the price at which the property would change hands between a buyer and a seller, neither under undue pressure to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property in the area are helpful in figuring out the fair market value of the property. You may also elect to have the property’s value appraised as of the date of its conversion to rental property. Either way, it's very important to have a good estimate of your home's fair market value on the date of the conversion.

Because of this rule, if your personal residence has lost value since you bought it, turning it into a rental home won’t allow you to deduct the loss that occurred before the conversion when you eventually sell it. Only the drop in value after the conversion is deductible.

Example

Jessica purchased a home in Chicago for $250,000. She lived in the home for seven years, made $50,000 in improvements, and then moved to Houston. Because of the poor real estate market, Jessica decided to rent her house instead of selling it. The home’s tax basis when she moved out was $300,000. However, due to the decline in real estate values, its fair market value when Jessica moved out was only $175,000—a loss of $125,000. Since it's lower than the home's basis, Jessica must use the $175,000 fair market value (less any depreciation deductions she takes) to determine her gain or loss when she sells the home. If she sells the house for $175,000, she has no deductible loss. She'll have a loss only if she sells it for less than $175,000.

To learn more, see Nolo's section on Tax Deductions and Credits for Homeowners.

Can a loss generated from residential or commercial realty be used on the tax return of the investor?

Can a loss generated from residential or commercial realty be used on the tax return of the investor? This question is asked often because there is so much confusion as a result of the passive activity loss rules adopted by Congress in 1986. The answer is yes if the basic rules of the Tax Reform Act of 1986 are met. The tax law states that losses from real estate activities in which the investor does not materially participate can only be used to offset income from passive activities. In this unit we will investigate the concept of losses and the proper calculations for the transfer (sale) of property. At the conclusion of this unit the student will be able to; •restate the passive loss rules •discuss proper calculations for the transfer of property •identify IRS provisions affecting investor taxation debbiesmall.net

What does AWC in a home listing meam? Is the house still available?

: I keep seeing some listings online that say “AWC” or Active with Contract. What does this mean? Is it available or not? A: Recently in our Multiple Listing Service there was a pretty major change with the addition of the “Active with Contract” status. Here’s what it means to you. When you are searching for a home either via an MLS feed that your Realtor has set up for you, or on a website like Realtor.com – you may notice some homes say “Active” while others say “Active with Contract” or “Pending”. Here’s the difference: Active (ACT) – Home is actively available on the market and does not currently have a contract on it. This doesn’t mean the Seller hasn’t received any offers yet – they may have – and its up to your Realtor to ask the listing agent. It does however mean the Seller hasn’t yet accepted any offers presented. Hurry and go see a listing that is active before it goes AWC or PNC! Active with Contract (AWC) – This status is often seen on short sales, but occasionally you’ll see it on non-distressed properties as well. The reason “AWC” – or Active with Contract – was created was to allow Realtors to continue marketing homes that were under contract already but have contingencies. Contingencies are things like “bank must approve the sale” or “financing” or “inspections” – things which must be completed or overcome in order for the sale to close. So why does the Realtor want to continue marketing an AWC listing? Two reasons. #1 – sometimes short sale contracts fall through either because the bank counters the offer presented at a higher number, causing the Realtor to have to start all over marketing for a new buyer. #2 – because the Realtor wants to find buyers even though the house is under contract and sell them other Active homes. Many times buyers ask me is it worth looking at AWC listings? The answer is maybe, but keep in mind if the current contract should fall through, the listing will go back to Active, and it will pop back up in your email notifications, and you can look at it then. If you really are in love with an AWC home you’ve seen online, your Realtor can always call the listing agent and inquire as to how strong the listing agent feels the current contract is. If its pretty strong, it may be better not to get your hopes up and move on. Pending (PNC) – This means the home is under contract and they are not currently seeking to continue marketing the home. Most contingencies will be removed once a listing goes “Pending”. Still – if you are in love with a pending house – it may be worthwhile to have your Realtor call the listing agent to see what the status is.

Short Sales, Foreclosures and Income Taxes: a Summary

Short Sales, Foreclosures and Income Taxes: a Summary If a taxpayer owes mortgaged debt to a lender and the lender cancels or forgives that debt in a short sale or foreclosure, in general the cancelled debt is taxable. However, the canceled amount may be excluded from taxation under the Mortgage Forgiveness Debt Relief Act of 2007. In general, this law allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2,000,000 of forgiven debt is eligible for this exclusion ($1,000,000 if married filing separately).

Mortgage Forgiveness Debt Relief Act of 2007

Tax Relief for Some Financially Distressed Homeowners Homeowners experiencing short sales and foreclosures were given tax relief under the Mortgage Forgiveness Debt Relief Act of 2007. Instead of treating cancellation of debt as taxable income on the foreclosure of a principal home, no taxes will be levied on discharges of indebtedness of up to $2,000,000 for married taxpayers filing jointly and of up to $1,000,000 for a married taxpayer filing a separate return through tax year 2012. The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero. The 2008 Economic Stabilization Act provided a three-year extension for home mortgage debt forgiveness relief. Qualified principal residence indebtedness is acquisition indebtedness (as discussed previously) with respect to the taxpayers' principal residence, but with a $2,000,000 limit ($1,000,000 for married individuals filing separately). Principal residence has the same meaning as under the home sale exclusion rules of IRC Code Section 121. Acquisition indebtedness of a principal residence includes refinancing of debt to the extent the amount of the refinancing doesn't exceed the amount of the refinanced indebtedness. The exclusion also does not apply to a taxpayer in a Title 11 bankruptcy. An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on an exclusion for insolvent taxpayers.

Taxes or how $100 becomes $60

a Federal Marginal Tax Rate of 28%, a State Income Tax rate of 7% and the requirement to pay Self-Employment Tax at 15.3% (rounded to 15%).
Before Tax Income: $100
Less Federal Income Tax of 28%: -$28
Less State Income Tax (not in Florida) -$0
Less Self Employment Tax of 15.3% (rounded to 15%): -$15
Equals after-tax or disposable income: $57

Using the example above, a self-employed taxpayer would need to earn $100 to have disposable income of $57.
Similarly, if the taxpayer was an employee and not self-employed, the taxpayer who earns $100 would have $64 in disposable income.
Before Tax Income: $100
Less Federal Income Tax of 28%: -$28
Less State Income Tax (not in Florida) -$0
Less ½ of Social Security from paycheck, (rounded) -8
Equals after-tax or disposable income: $64

Taxes marginal tax rate

A taxpayer’s marginal tax rate is determined after total income and adjustments to that income are calculated. The marginal rate is essentially the amount of tax paid on an additional dollar of income, so the marginal tax rate for any individual will increase as his or her income rises. This method of taxation aims to fairly tax based on an individual's earnings, with lower income earners to be taxed at a lower rate than higher income earners.
Taxable income can be calculated by starting with the Gross Income. Subtract Adjustments from it and you have Adjusted Gross Income also referred as AGI. After deducting Standard or Itemized Deductions and Exemptions, your result is Taxable Income.
After taxable income is determined, the taxpayer needs to refer to the tax tables by filing status (single, married filing jointly, married filing separately, and single head of household) that are set each year by the IRS.