tax question

[brewer12345]

I will be selling my primary residence at a loss compared to my purchase price. Can I claim this as a capital loss for federal income tax purposes?

 

[jerome len]

don't think so but talk to your CPA. A personal home has different rules, if you haven't had any business usage, I don't think you can take the loss. If, on the other hand, you had business usages, home office, home was rented, it could, but doubtfully, fall under a different category. ONLY someone very familiar with real estate tax law should answer this question. I have quite a bit of property, but I wouldn't do a thing without her checking current guidelines.

 

[HatePayingTaxes]

Nope. Pg 5 under Amount of Gain or Loss. http://www.irs.gov/pub/irs-pdf/p523.pdf

Stupid b/c you have to include the gain but can't take the loss.

 

[Moemg]

My husband worked for the IRS . He inherited a house that was valued at $300,000 . It was sold for $225,000 and he claimed a loss on his taxes . This was in 1992. So I would check with an enrolled agent .

 

[Running_Man]

Absolutely not, personal losses on personal property are not deductible

 

[jimnjana]

My husband worked for the IRS . He inherited a house that was valued at $300,000 . It was sold for $225,000 and he claimed a loss on his taxes . This was in 1992. So I would check with an enrolled agent .

This was correct provided he did not live in the house prior to selling. He inherited an asset with FMV of 300K, he sold it for 225k, so he was entitled to taking 75k loss on the asset.

Different set of rules for selling your primary residence...very straight forward instructions, considering coming from the IRS.

 

[MichaelB]

I will be selling my primary residence at a loss compared to my purchase price. Can I claim this as a capital loss for federal income tax purposes?

Sorry, but no.

 

[Meadbh]

I'm glad to hear Brewer is able to sell his house!

 

[sheehs1]

My husband worked for the IRS . He inherited a house that was valued at $300,000 . It was sold for $225,000 and he claimed a loss on his taxes . This was in 1992. So I would check with an enrolled agent .

If I'm not mistaken this might have fallen under "income in respect to a decedent"....and it would have allowed him a loss...because...in theory .the house was valued in the estate, the estate either paid tax on it or if the estate was under the allowable credit. limit and no tax was due...it was inherited property. ..no tax due at the time he inherited it. But because the value was listed on the estate return as $300,000 he was allowed to take the loss when it sold for less.

 

[Hobo]

If I'm not mistaken this might have fallen under "income in respect to a decedent"....and it would have allowed him a loss...because...in theory .the house was valued in the estate, the estate either paid tax on it or if the estate was under the allowable credit. limit and no tax was due...it was inherited property. ..no tax due at the time he inherited it. But because the value was listed on the estate return as $300,000 he was allowed to take the loss when it sold for less.

I had a similar case where I had a house that was "underwater" (mortgage higher than current market value). What I did was to rent it out for the necessary time (1 year?) so I could claim the house as rental property. Then, when I sold the house, I claimed the house as a business loss and took the loss as a capital loss.

Not exactly the right way to do things under the Standard Rules of Accounting. I should have listed the purchase price as the fair market value when the house was converted from personal residence to income property. But I forgot that rule when I filed my taxes that year.

BTW, anybody who does not study and learn the IRS tax code and relies on an tax preparer to fill out the necessary paperwork, will loose a lot if money. Professional tax preparers, whether Accountant or bookkeeper, will always bend the rules in favor of the IRS. If you do your own taxes you can a) find a lot of loopholes and b)always claim you didn't understand the regulations.

 

[Alan]

Sorry, but no.

I agree.

You can make a gain up to $500k when selling your primary residence (filing jointly) without paying tax, so it makes sense that you can't claim tax relief on a loss.

 

[clifp]

Not exactly the right way to do things under the Standard Rules of Accounting. I should have listed the purchase price as the fair market value when the house was converted from personal residence to income property. But I forgot that rule when I filed my taxes that year.

BTW, anybody who does not study and learn the IRS tax code and relies on an tax preparer to fill out the necessary paperwork, will loose a lot if money. Professional tax preparers, whether Accountant or bookkeeper, will always bend the rules in favor of the IRS. If you do your own taxes you can a) find a lot of loopholes and b)always claim you didn't understand the regulations.

Oh you mean be a tax cheat. My experience is that accountants work hard to save you money, without risking jail time.

Ignorance is really no excuse, and while the IRS is very unlikely to throw you in jail certainly they'll be happy to fine the heck out of you.

 

[MichaelB]

I had a similar case where I had a house that was "underwater" (mortgage higher than current market value). What I did was to rent it out for the necessary time (1 year?) so I could claim the house as rental property. Then, when I sold the house, I claimed the house as a business loss and took the loss as a capital loss.

Not exactly the right way to do things under the Standard Rules of Accounting. I should have listed the purchase price as the fair market value when the house was converted from personal residence to income property. But I forgot that rule when I filed my taxes that year.

BTW, anybody who does not study and learn the IRS tax code and relies on an tax preparer to fill out the necessary paperwork, will loose a lot if money. Professional tax preparers, whether Accountant or bookkeeper, will always bend the rules in favor of the IRS. If you do your own taxes you can a) find a lot of loopholes and b)always claim you didn't understand the regulations.

Why not become a tax accountant yourself and help others [-]unlawfully evade[/-] find loopholes? The IRS is forgiving to people who "don't understand the regulations". Just ask Wesley Snipes.

The accountants I've worked with were very good and I learned a great deal from them. Bragging about cheating on your taxes isn't good form. Urging others to do the same is not smart. Doing both on a public forum ... you get the message. Or at least most here will.

 

[brewer12345]

Thanks, guys. Figured as much.

 

[Hobo]

Why not become a tax accountant yourself and help others [-]unlawfully evade[/-] find loopholes? The IRS is forgiving to people who "don't understand the regulations". Just ask Wesley Snipes.

The accountants I've worked with were very good and I learned a great deal from them. Bragging about cheating on your taxes isn't good form. Urging others to do the same is not smart. Doing both on a public forum ... you get the message. Or at least most here will.

If you were a tax preparation specialist, what call would you have made under these circumstances of a primary residence converted to a rental? What is the property's basis for tax purposes? I bet that not one citizen in ten would even know they are making a mistake.

But I agree, it is poor form to openly admit that one has knowingly made an error on one's taxes. I had a wealthy friend who got rich off real estate. One rainy April day he said, "Whenever I fine my taxes I feel like I have either paid too little or too much to the government". I have often had that feeling.

 

[Alan]

If you were a tax preparation specialist, what call would you have made under these circumstances of a primary residence converted to a rental? What is the property's basis for tax purposes? I bet that not one citizen in ten would even know they are making a mistake.

But I agree, it is poor form to openly admit that one has knowingly made an error on one's taxes. I had a wealthy friend who got rich off real estate. One rainy April day he said, "Whenever I fine my taxes I feel like I have either paid too little or too much to the government". I have often had that feeling.

Years ago I remember listening to a report where they had reporters with a variety of financial situations visit many tax preparers, and a large number of returns had as many different results as there were tax accountants.

The tax code is way too complicated, imo.

 

[teejayevans]

Absolutely not, personal losses on personal property are not deductible

The key word being "Personal", investment property you can.
TJ

 

[GregLee]

I've always done my own taxes -- not hard, since my affairs have been very simple and straightforward. But several times I made mistakes (in my favor), and the IRS just sends me a bill. I underpaid by $800 last April, and got the bill a few weeks ago, which included a $5 penalty. Big deal. The penalties for my minor errors have been so trivial that it's not worthwhile even being terribly careful filling out the return. When I started doing my mother's returns, I was not impressed with the job HRBlock had done for her in previous years.

 

[Hobo]

I've always done my own taxes -- not hard, since my affairs have been very simple and straightforward. But several times I made mistakes (in my favor), and the IRS just sends me a bill. I underpaid by $800 last April, and got the bill a few weeks ago, which included a $5 penalty. Big deal. The penalties for my minor errors have been so trivial that it's not worthwhile even being terribly careful filling out the return. When I started doing my mother's returns, I was not impressed with the job HRBlock had done for her in previous years.

If the IRS just sends you a bill, it most likely means you made a math error, or perhaps filled out the wrong line on a form. Anyway, it is an error that would cause an IRS computer to pull out a tax return. Presumably it is reviewed by a human before sending you a bill and a small penalty.

If I am not mistaken, the IRS has several levels of review or audit. All returns are scanned by a computer to check for a math error. Only a very few are selected for a major audit. For the most part they will ask you to verify a certain item that you put on one of the forms. I have had that a couple of times, where my rental expenses were statistically higher than normally expected for similar properties. No problem; I keep all my receipts carefully organized. The IRS will even send you a letter saying "good job, keep up the good work". It is the detailed audit that is terribly time consuming and carries the largest penalties if the IRS finds a sizable error.

Good point with regard to H&R Block and the tax prepares at WalMart. The people who prepare returns are give a crash course in tax preparation and sent out to work. Over the years, I have looked for good accountant or bookkeeper to prepare my taxes. They certainly can be relied upon to provide good advice on certain subjects. But keeping up with the tax code and doing my tax planning accordingly saved me a bundle on taxes. I have never calculated exactly, but I bet the money saved on taxes by careful tax planning cut 5 years off my retirement age. These days, if you have a sizable income the job has been made much easier using computer programs like TurboTax®.

 

[JOHNNIE36]

Brewer12345, I had a similar situation on our 2010 tax return. We purchased a new home in Dec 2009. Had not been able to sell our old one so we rented it out in April 2010. In November, the renters decided they wanted to buy it so we sold it to them and closed on 01-01-2011, holding the mortgage ourselves. When we went to do our 2010 taxes, the CPA informed us that we would be able to claim a capital loss as we sold it for less than we paid by about $12000. Maybe if you could convert your residence to a rental for a year, then sell it, the whole picture is changed.

Actually, we sold it for at least $25000 less than we had into that house because of upgrades; however, I thought otherwise about filing an ammended return. In fact, the CPA wouldn't let us claim the entire capital loss in 2010. We have to do it $3000 per year. I didn't want to muddy the waters.

 

[pb4uski]

Brewer12345, I had a similar situation on our 2010 tax return. We purchased a new home in Dec 2009. Had not been able to sell our old one so we rented it out in April 2010. In November, the renters decided they wanted to buy it so we sold it to them and closed on 01-01-2011, holding the mortgage ourselves. When we went to do our 2010 taxes, the CPA informed us that we would be able to claim a capital loss as we sold it for less than we paid by about $12000. Maybe if you could convert your residence to a rental for a year, then sell it, the whole picture is changed.

Actually, we sold it for at least $25000 less than we had into that house because of upgrades; however, I thought otherwise about filing an ammended return. In fact, the CPA wouldn't let us claim the entire capital loss in 2010. We have to do it $3000 per year. I didn't want to muddy the waters.

Johnnie, if you have capital gains from either the sale of investments or capital gain distributions from a mutual fund, you can use some of your unused capital losses against those gains as well and then up to $3,000 each year against other income until the losses are fully used.

If your loss was really $25,000 rather then $12,000 you might as well file and amended return and claim it - talk with your CPA.

 

[JOHNNIE36]

Johnnie, if you have capital gains from either the sale of investments or capital gain distributions from a mutual fund, you can use some of your unused capital losses against those gains as well and then up to $3,000 each year against other income until the losses are fully used.

If your loss was really $25,000 rather then $12,000 you might as well file and amended return and claim it - talk with your CPA.

I got so excited about the capital loss that I forgot to consider all the improvements we had made to the property. The CPA asked me for the purchase price and I had that readily available. I'm a little reluctant to stir the pot.

 

[Hobo]

After doing a bit more research, the standard IRS rule is the basis for the house should be reset to the fair market at fair market value at the time the house was converted from personal residence to rental property. After that reset in basis, the house is considered to be real estate investment property. At that point any of the usual rental property tax deductions (depreciation, expenses, etc) will apply.

Setting the house at the basis value of the house prior to conversion is wrong. I think your accountant knew this and was very conservative about his approach to setting the tax basis for your the house. If you did have a legitimatize capital loss incurred during the time the property was used as rental property, then you must take that loss at the rate of $3000 per year.

The discussion demonstrates how complex the tax code really is. If the rules are fully understood and applied properly, you can substantially reduce your tax burden.

 

[Brat]

Given Brewer's move across the country I doubt that he wants to rent his former home. There are times to just move on even if the tax man cometh....

 

[Alan]

Given Brewer's move across the country I doubt that he wants to rent his former home. There are times to just move on even if the tax man cometh....

Exactly.

Converting to a rental and selling a year later to lock in capital losses does not work too well imo. As mentioned above, you have to know the fair market value on the date on conversion, and when you sell it is against that value that a capital loss is calculated.

However, if the house appreciates and you end up with a capital gain, you have to calculate it based on the original purchase price plus all the capital improvements you made from that date.

Here is an article describing this.

The special rule says that when you convert a former residence into a rental, your initial tax basis for calculating any later loss on a sale equals the lesser of: (1) the property s basis on the conversion date under the normal rule, or (2) the property s fair market value (FMV) on the conversion date.
In effect, the special rule disallows the loss from a decline in value that occurs before the conversion date. But a post-conversion decline will result in an allowable tax loss to the extent it's not offset by depreciation write-offs. (Because depreciation lowers the property s tax basis for loss purposes, it makes it harder to have a loss.)