Prepared by Michael Menninger, CFP
What Happens if You Sell Your House at a Loss
Let’s begin by noting that the IRS laws do not allow tax deductions of selling a house at a loss. So, how can you do it?
I recently had a client who was retiring and moving to another state. She contacted me because she planned to sell her home and wanted to consult with her financial advisor to do her due diligence.
She told me she had already considered getting an apartment so that she could show her home without having to take her pets to the kennel when prospects came for showings. This conversation is what prompted my idea of selling her primary residence at a loss. So we called our CPA to confirm we could implement my idea within the confines of the IRS rules.
Is a Loss on a House Tax Deductible?
A taxpayer may NOT take a tax loss on the sale of their primary residence, but they CAN take a loss on the sale of a rental property. Thus the client decided to convert her primary residence to a rental property. She got an appraisal for the home, which was now considered to be her cost basis. She rented her home for about 6 months, crossing over calendar years, subsequently selling a house at a loss.
Using a Financial Advisor to Identify Potential Savings
In her particular instance, it was an enormous windfall. She was able to have the house appraised for $675,000, despite only selling it for about $530,000. This gave her a $145,000 capital loss, the rental “loss” for those 6 months, AND a lower realtor fee due to the reduction in sale price. In the end, there was a roughly $175,000 loss she took on the property.
Learn about the value that an experienced certified financial planner can help you take advantage of.
Leveraging a Financial Advisor to Understand Tax Law Nuances
It gets better! Unlike capital losses from investments, which are limited to $3,000 on your tax return, she was able to take the entire $175,000 loss directly against her ordinary income. This loss can then provide many additional favorable results. In her case, that loss offset a $175,000 conversion from her IRA into a Roth IRA, helping ensure she paid effectively paid no income tax on the conversion. This was a HUGE win, to the tune of a tax savings of almost $50,000, which was far greater than the cost of renting an apartment for 6 months.
Tax laws are always changing and can be extremely stressful to understand, it is important to use a trustworthy tax advisor like Menninger & Associates as your tax advisor
Can This Leverage Be Used for Other Home Sales?
This strategy can also be applied to a vacation home! Vacation homes are treated like primary residences as they pertain to claiming losses when sold.
These tax loopholes are always at risk of being closed. If any of these situations apply to you, contact your financial advisor, and also confirm with your CPA or tax preparer to review the specific tax laws as they may pertain to your situation.
Look for next month’s “Trick of the Trade” on ways to reduce or eliminate a capital gain from the sale of your vacation home!
Contact Menninger & Associates to learn about our solutions for your unique financial circumstances.
Please note that neither Cetera Advisor Networks LLC nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.
Topics discussed and disclosures displayed in articles dated prior to November 28, 2022 reflect the requirements from previous Broker-Dealers. Please see the footer of the website for how services are currently provided.