But, you can turn the tax rules in your favor.
Strategy: Convert the home into a rental property. In other words, move to new digs before you sell the home and hold your home out for rent. Then, you can write off the loss when you finally sell the property.
You’re probably aware of the giant home-sale exclusion that allows you to pocket up to $250,000 of tax-free gain from a home sale ($500,000 for joint filers). But no corresponding tax break exists for personal residence losses. You net zero tax benefit when you sell your home at a loss.
The tax rules differ for investment or business property. While you’re renting out the place, you’re entitled to the same tax advantages as any other landlord. That means you can claim deductions for depreciation, utilities, insurance, etc.
Of course, the rental income is subject to tax. But the deductions should offset much, if not all, of your tax liability.
Best of all, when you finally sell the home, you can deduct the full loss.
How much is your ‘loss’?
When you convert your home to rental property, the amount used to determine your gain or loss equals the lesser of your basis in the property or the value of the home at the time of the conversion. Example: Let’s say you recently bought your home for $500,000. Due to a real estate slump in your area, the home is worth $475,000 at the time you convert it to a rental property. If you eventually sell the home for $450,000, your loss equals $25,000, not $50,000.
So, if you’re going to convert in a declining market, do it sooner rather than later. That way, you can lock in a higher value on the conversion date.
Do you actually have to rent out your home to qualify for this tax break? It certainly helps.
The IRS may question you if you claim that you’ve unsuccessfully listed the home for rent. But it’s not unprecedented.
Keep detailed records to support your claims.
Tip: Rent out your home for a period of at least two years before selling it. That should put the IRS at ease.
Suppose the housing market in your area recovers and your home zooms back up in price. You can reconvert it to a personal residence. The home-sale exclusion is still available if you’ve owned and used the home as your principal residence for two of the past five years.
- Small Business Tax Deduction Strategies No matches