Rental properties are solid investments and a steady source of income during the retirement years. Unfortunately, some investments go south – the good news, though, is that selling a rental property at a loss brings with it the possibility to receive a tax deduction.
Typically, capital gains tax is paid when a rental property or other capital asset is sold for a profit. The situation changes when a rental property is sold at a loss since that loss can be used as a deduction in your income taxes. The loss on the sale of your rental property is determined by first finding out the tax basis of the property – in other words, the purchase price and the cost of any upgrades or additions to the property. If your sale price is lower than the tax basis, then you should be able to deduct the loss from your income taxes.
Keep in mind that this deduction only applies to rental properties and not primary residences. The rental property must be classified as an investment in order to receive the deduction. Many seniors, however, turn their primary residences into rental properties when they move out of state or into a senior community. That means the tax deduction is available on this property, though there is a very important distinction that must be in place: the loss in value must have occurred after the primary residence became a rental property, not before. The loss cannot be claimed as an income tax deduction if the loss occurs while the property is still classified as a primary residence.
This tricky situation comes up with numerous elderly homeowners, so it’s important to consult with an experienced elder law attorney before you sell your rental property so you can get a good grasp on the ins-and-outs of real estate tax deductions. Many seniors have tried to navigate this complicated area of real estate on their own and, unfortunately, have ended up paying heavy fees and fines to the U.S. government. This leaves them in a bad spot since, instead of saving money, they lost more than they thought they would and are left in a difficult position during a time in their lives when income is anything but guaranteed.
If you have a rental property you want to sell, or if your rental property has declined in value and you think you qualify for a tax deduction, please call us at 800-244-8814 to set up a consultation.