Loss on a personal residence
This entry was posted on 10/6/2006 1:31 AM and is filed under uncategorized.
A loss on the sale of your personal residence is not deductible on your form 1040. The IRS considers it "personal" as opposed to a business or investment loss. Likewise the loss on the sale of a second home is not deductible.
There are situations that may make a loss on your home deductible however. If you suffer a causualty, for instance a hurricane wrecks your house, and you don't have enough insurance, and you then sell it, deducting the loss on the casuality is worth looking at.
Some of my clients ask about converting their house into a rental property, and then selling it. The IRS as usual is one step ahead here. You can convert your house, or second home into a rental property for tax purposes. This is a subjective area of the tax law though. Your basis on a converted home would the smaller of its purchase price, plus closing costs not already taken, plus improvements, and its Fair Market Value (FMV) on the date of conversion. Of course its FMV is subjective, and the closer the conversion date to the date of sale, the stronger the argument that its FMV at conversion was about what you got for selling it, thus making your loss small.
If you take a loss on the sale of a rental property, you are limited to deducting the sum of your capital gains plus $3000 in the year you sell it, with the excess being carried forward until the loss is used up, perhaps against future gains, but at least $3000 per year. This rule actually makes taking a loss, when the issue is subjective - less risky because if you have no capital gains to offset, you are only deductiong $3000 a year.
A $100 subjective deduction is less risky than a $10,000 subjective deduction.
