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Taking A Tax Loss On the Sale of Your Primary Residence Thumbnail

Taking A Tax Loss On the Sale of Your Primary Residence


Converting Primary Residence to Rental Property for Tax Purposes

Prepared by Michael Menninger, CFP

Retiring and Relocating – The Decision to Sell at a Loss

Let’s begin by noting that the IRS laws do not allow tax deductions for 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.

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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 aforementioned 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 the house at a loss.

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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 strategist like Menninger & Associates.

Can This Leverage Be Used for Other Home Sales?

This tax planning strategy can also be applied to a vacation home! Reduce capital gain tax on vacation homes; which 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.  

Strategies for Maximizing Tax Losses

While taking a tax loss on the sale of a primary residence may not always be straightforward, there are several strategies homeowners can consider to maximize their tax benefits:

Document Home Improvements

Keep detailed records of any improvements made to your home, as these costs can be added to your home's basis and reduce the amount of loss realized on the sale.

Consider Timing

If you anticipate selling your primary residence at a loss, consider timing the sale strategically to maximize tax benefits. For example, selling the property in a year with higher taxable income can help offset other capital gains.

Consult with a Tax Professional

Tax laws regarding the sale of primary residences can be complex and vary depending on individual circumstances. Consulting with a qualified tax professional can help ensure you understand your options and maximize your tax benefits.

Guidance From Menninger & Associates for Your Financial Journey

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.

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Michael Menninger, CFPAbout the Author: Michael Menninger, CFP®️

Michael Menninger is the founder and president of Menninger & Associates Financial Planning. With 20+ years of financial planning experience, Michael helps his clients pursue their financial goals through a hardworking, common-sense and detail-oriented approach to financial planning. He provides personalized service, builds lasting relationships, and maintains a disciplined, long-term outlook. He uses his experience and wide-ranging business and educational background as a basis for creating financial plans unique to each client's goals and aspirations.

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