Everything You Need to Know About Selling Your Property at a Loss
First things first, what does it mean to sell your property at a loss?
The property is considered to be sold at a loss when it is sold for less than your total investment in the property (capital balance). This includes with every improvement or addition to your property, excluding maintenance, your capital balance will increase according to those costs.
If your capital balance is high you will benefit more with your taxes. With a high capital balance you will either have a lower total gain or a higher total loss. Tax benefits are important to understanding everything you need to know about selling your property at a loss.
Let’s Talk Taxes
Selling your property at a loss can get you numerous tax deduction benefits, particularly if your property is a personal investment property or rental property.
Personal Investment Property:
When the property you intend to sell is a personal investment, the loss is referred to as a capital loss.
So what exactly are capital assets?
They are things like bonds, investment property and stocks.
If you end with a capital loss, the first step is to decrease your gains from any other sales.
For example: If you make a loss on one sale but make a profit on another sale that is equal to your loss, the two sales will cancel each other out.
Why is this important?
From a personal income tax perspective you will not owe any taxes for that particular year. However, if your total capital loss is higher than the total capital gain for that year, then you can deduct a maximum of $3,000 in losses from any of your other income sources. If $3,000 doesn’t cover it and you have leftover losses for that year, you are able to carry them over for your future tax returns. This process can be repeated until you have depleted the tax benefits from the loss.
Rental Property:
If you sell rental property at a loss you are in line to get even more tax benefits. If you have owned your rental property for more than a year, the IRS will consider your loss to be a 1231 loss.
What is that?
A 1231 loss allows you to use the loss against all of your other income for the year as a full deduction. If the full deduction from your income still does not cover the loss, you can carry back the losses against your income from the previous two years and obtain a refund. If after all of that you still have losses that haven’t been covered, you can continuously carry it forward for up to 20 years.
Personal Residence Property:
So far everything you need to know about selling your property at a loss seems to be tax benefits. Unfortunately, that is not the case with your personal residence.
Why not?
With your personal residence, you cannot deduct this particular loss from your taxes because the IRS doesn’t tax any gains you make from selling your personal residence for a profit.
Besides Tax Benefits
Tax benefits are not the only benefits of selling your property at a loss. There’s even more to understanding everything you need to know about selling your property at a loss!
Other advantages besides tax benefits:
Avoid Further Property Value Decrease - If the prices of property are falling, including yours, selling your property at a loss will help you avoid the value decreasing even further. With the sale of your property, you are able to take advantage of the low rates and buy another house before interest rates increase making a new house more expensive.
Short Sale:
If the unfortunate event that you are facing foreclosure, the banks, on occasion, will allow homeowners to sell houses for less than the amount they owe in order to avoid foreclosure.
This type of sale is called a short sale.
In this case, the sale of your house at a loss is an easier option than the heartache and stress that is experienced with foreclosure.
Credit Score
Unfortunately a short sale can have a negative effect on your credit score just as a foreclosure would. However, a short sale on your credit record carries far less weight than the effects of a foreclosure. Plus, you may manage to complete a short sale on your property before you lender reports a deficit balance!
These are the main things to understanding everything you need to know about selling your property at a loss.
But, we do recommend a little more research that can cater to your particular situation better.
In order to fully understand everything you need to know about selling your property at a loss, consult the services of a tax attorney or an accountant. They will help you figure out the tax basis and benefits of your property prior to you selling it!