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Can I Write Off Losses From a Rental Property Sale?

Question: I recently sold a rental property for less than half of what I paid for it. Can I write off the loss?

– Lillie Lewis, Memphis

Answer: The short answer is yes—but with a catch. The Internal Revenue Service lets you write off the difference between the original value of an asset (its “cost basis”) and the selling price as an ordinary loss. But that cost basis isn’t simply what you originally paid for the property; it also includes depreciation for each year that you owned it, whether you claimed it on your return or not, says Ted Sarenski, president of Blue Ocean Strategic Capital in Syracuse, N.Y. To figure the depreciation, he says, divide the original purchase price by 27.5 (the number of allowable years of depreciation for residential real estate), and multiply that by the number of years you owned the property.

NOTE: A version of this answer that ran in SmartMoney magazine incorrectly called the loss a capital loss.

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    • steve-part of the point is that it’s easier to grow in % terms from a lower level.2.2% of 43k is $9462.2% of 33k is $726.the petcanrege growth may be the same, but the dollar growth in the US is 30% higher.THAT is a very big deal.at equal growth rates, the us will keep increasing it’s lead in per capita GDP.%’s can be very misleading here.you could be haiti and raise your per capita GDP 10% and that would still only be $120.the % looks great, but in terms of actually new production and buying power, not much has happened.the other “european price” is that they have far less than americans do.they own fewer cars, tv’s, washer/dryers, and live in homes half the size we do. their middle class have homes the size of americas poor.they also have far lower class mobility and entrepreneurial activity.that sounds like a pretty heavy price to me.

    • The answer above doesn’t make any mention of limitations based upon income. Is that not a consideration?

    • The loss on the sale of rental real estate owned for more than one
      year would not be a capital loss. It would be an ordinary loss
      under IRC Section 1231. Any gain after owning the property for
      more than a year would be taxed as a long-term capital gain.

    • I second Mr. Nonnemacher’s recommendation that you have a tax expert look at the transaction, if not your entire return. Real estate taxes aren’t rocket science, but the area does require some knowledge and a lot of attention to detail. Each item on the purchase and sale escrow statements needs to be classified correctly as income, expense, capitalized-and-depreciable, or capitalized-and-non-depreciable (e.g., land). Debt on the property is another area that has complications. Final note: the loss may be ordinary under the section 1250 rules and not subject to the $3,000 capital loss limitation.

    • I will do the work

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