If you sell a house that was converted to rental property at a loss, you might qualify for a tax deduction. By Kimberly Lankford, Contributing Editor February 10, 2010 We lived in our house for about one and a half years, then we moved out of state and did not sell our house because the price would have been less than what we owed on our mortgage. So we rented it out and finally sold for a big loss almost two years later. Now we’re wondering whether we can claim the loss on our taxes.Selling a principal residence for a loss doesn’t qualify for a tax deduction. Because you rented out your house, the loss may be tax-deductible -- in theory. But it’s tricky. When you convert a home to a rental property, your tax basis -- the amount on which you’ll determine gain or loss -- is either the original basis or the market value of the property at the time of the conversion, whichever is lower. Because housing values had plummeted by the time you rented out the house, your new basis could be much less than your original purchase price. Any loss due to falling prices while you lived in the house wouldn’t count for tax purposes. Sponsored Content But if the house’s value continued to drop during the time it was a rental, you might have a deductible loss. To figure the loss, you must first subtract any depreciation allowable on the rental from the basis. Then compare the reduced amount with the proceeds of the sale. If it’s a loss, you get a deduction; if it’s a gain, any part attributable to depreciation is taxed at 25% -- unless you’re in a lower tax bracket, in which case the corresponding rate applies. Any additional profit would be taxed as a long-term capital gain, up to 15%, depending on your other income. For more information about taxes and rental property, see What to Know if Your Rent Out Your House. Also see IRS Publication 527, Residential Rental Property. Got a question? Ask Kim at firstname.lastname@example.org.