Within the current real estate market where the money owed on a mortgage is often higher than what a home will sell for, minimizing such financial losses becomes quite important in maintaining the status quo. Many individuals are asking: what can be done to recoup these types of financial losses? Can homeowners deduct such a loss from their income taxes at year-end?
While a loss sustained due to the sale of a personal asset such as a home is not deductible, there is an additional option: converting that home into a rental. By converting a home into a rental, the government no longer considers the property a personal asset, but rather an investment asset, and a loss taken at the sale of an investment asset is tax-deductible.
One must consider all variables in doing this, and there are some requisites which must be adhered to, such as:
- the property must be rented to someone unrelated to you
- the rent must be set at a comparable market price
- the income received must eventually be reported to the IRS
However, even with all this you will most likely have little or no taxable rental profits due to the home’s depreciation and other expenses which are also considered rental tax deductions. When all is said and done, the loss may turn out to be less than anticipated, especially considering that a loss from the sale of a rental property is tax deductible as an ordinary loss. An ordinary loss is deductible in full against your normal income such as wages and interest earned.
Thus the eventual sale of that rental can be a sort of stop-gap in easing the difference between what you originally paid to the bank for the home, and what you eventually sold it for (the rental income received over the months and the tax deduction on the loss becoming a part of this financial recovery). In many instances this option can help individuals to recoup as much of their financial loss as possible.
All of the tax implications of converting and selling real estate, whether at a profit or a loss, can be quite complex; it is important to consult trained and knowledgeable professionals. Contact Tiffiney Graham and get the expert advice and experience that only a specially trained Columbus GA REALTOR® can provide.
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