Tax Breaks

Taxes and Home-Sale Losses

If you sell a house that was converted to rental property at a loss, you might qualify for a tax deduction.

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.

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.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS updated its popular online tool so that you can track the status of your second stimulus check.
January 9, 2021
Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package
Coronavirus and Your Money

Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package

Under Biden's plan for a third stimulus check, the $600 second-round stimulus checks would be increased to $2,000.
January 14, 2021
6 Reasons Why Your Second Stimulus Check Might Be Delayed
Coronavirus and Your Money

6 Reasons Why Your Second Stimulus Check Might Be Delayed

The IRS started delivering second-round payments in December. If you're still waiting for your money, here's why your second stimulus check could be l…
January 9, 2021

Recommended

How to Handle an IRS Audit of Your Tax Return
tax returns

How to Handle an IRS Audit of Your Tax Return

Don't panic! Keys to success include being well prepared, establishing credibility right from the start, and keeping your wits about you.
January 15, 2021
12 IRS Audit Red Flags for Retirees
retirement

12 IRS Audit Red Flags for Retirees

Seniors Beware: Your actions can increase the chances of the IRS giving your tax return a closer look.
January 14, 2021
22 IRS Audit Red Flags
tax returns

22 IRS Audit Red Flags

There's no sure way to avoid an IRS audit of your tax return, but these red flags could increase your chances of drawing unwanted attention from the I…
January 12, 2021
Charitable Tax Deductions: An Additional Reward for the Gift of Giving
Tax Breaks

Charitable Tax Deductions: An Additional Reward for the Gift of Giving

Because of the worldwide pandemic and related restrictions, your donations to charity are needed more than ever this year. And, with charitable tax de…
January 9, 2021