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Saturday, June 2, 2012

Can you claim a loss on your taxes for real estate?

Is your family outgrowing your house? Are your offspring expanding while your walls seem to be closing in? Do you and your signot (significant other) just want to get out of dodge? What do you do with your house now that you can't sell it (at least not without a loss)?


First off, I am not a tax expert. However, I have done some research whether or not you can claim a real estate loss on your taxes. You may know (or not) that you cannot claim a loss on your primary residence. If you sell below your cost basis (what you bought it for plus improvements) you are out of luck. Many of us are in a situation where our homes are worth less than when we purchased them so this would be nice, but not true. So I was thinking... what if you converted your home into a rental property, and then sold it?

This could work, but only under certain circumstances. First, the property must be a rental property for at least one year. Second, (and this is the kicker) the cost basis that you use in determining whether you have a loss is the fair market value of your home when you convert it to a rental. So if you bought your house for $250,000 and now it's worth $175,000 (and this is when you convert to a rental), the cost basis you use when you sell your home will be that lower number. So if you sell it at $200,000 a year later, you will actually have a gain of $25,000. Now if you switched your property to a rental several years ago (before this whole mess), you may be in business to claim a loss on your taxes.

There are a lot of other tax issues to consider when renting your home. So if you are thinking about renting your primary residence-do your research! If you are willing to read long, boring jargon, the IRS website has an abundance of information on the topic (of course). Here's a good article to get you started. If you are more comfortable with just a Google search, just be aware of the source of the information; you do not want to make a decision based on a 13 year old "expert" posting on some random website or fall into a sales scheme of some kind! Happy hunting!

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