April 30, 2019
Selling an Investment Property at a Loss
Property investors buy properties to rent envisioning a steady stream of income and an increasing property value. But it doesn’t always work that way. Sometimes the market flattens out and it’s just not possible to get the same asking price. Other times, for one reason or another, landlords end up pouring more money into a building than they can hope to get out of it.
If you sell rental property for a profit, you might have to report capital gains at tax time, however, if you are writing off a loss when selling your investment property, it’s deductible from your annual tax. (Learn more about the different types of taxable income on the Internal Revenue Service website on “Capital Gains and Losses.”) But first, you need to figure out your cost basis.
You calculate the cost basis by adding together the property’s purchase price with any associated closing costs and improvements. Note, that improvements are things like adding a new roof, or installing new windows, not things like routine maintenance.
Here’s an example. Let’s say you bought a great little rental property for $150,000, with $7,000 in closing costs. You had to put in a new furnace and reno’ed the kitchen and bath for another 13,000. The grand total adds up to a cost basis of $170,000.
However, you need cash fast and must sell the property despite a weakened market. You might only get $120,000 for it now. To figure out your loss, you deduct your total cost basis from your asking price. In this case, it works out to a net loss of $50,000.
Use Long-Term Loss to Offset Gains
Provided you’ve been the owner of the property for over one year, it will be treated as a long-term capital loss. This means you can use the loss to counterbalance any other capital gains made from other investments in the same tax year. For instance, let’s say you invested in stocks that did well, you can use your net loss to help offset that capital gain.
If your investment property has been losing money in past couple of years, there’s a chance you have passive activity losses (PALs). Typically, you might be able to deduct these passive losses only against passive revenue from other sources like rentals or other passive business activities.
Don’t Forget Depreciation
Every year, your rental property depreciates in value. Depreciation helps you to reduce your overall tax liability by reducing your profit or boosting the loss on your rental property. The IRS looks at your depreciation and when you sell recaptures depreciation at a 25% tax rate if you sell for more than your depreciated basis. It’s important to work with your CPA to make sure nothing is overlooked.
Profits & Loss
Every investment person needs to have an exit strategy for their properties. While it’s not always possible to predict market trends, it is possible to keep a sharp eye on the profitability of your properties. A property management solution delivers robust reporting, so you can monitor and track expenses, rent rolls and easily keep tabs on your balance sheet. If you’d like to see what Property Vista can do, check out our pricing and reserve your demo.