How to Report a Real Estate Loss on Taxes

Deduct investment property loss from your income tax.

Real estate property you sell at a loss may qualify for tax deductions in the year of the sale, but this must be investment real estate, not your residence. According to the IRS, you cannot deduct the loss from the sale of a residence. To sell investment property at a tax loss you must sell it for less than the adjusted tax basis, which the original price you paid plus the costs of any improvements you made that you did not take prior deductions for.

Things You'll Need

• Property sale documentation
• Home improvement documentation
• Prior income tax returns

Instructions

1. Calculate the original basis of the property. Write down the original price you paid and add any other cost involved in the purchase. These include escrow, title, recording, insurance, transfer taxes, commission and home inspection costs.

2. List the cost of any improvements you made. Add these costs to the original basis of the property price.

3. Calculate any depreciation of the property you haven't deducted previously. Review your prior tax returns and consult with a real estate appraiser or accountant to estimate this depreciation correctly. Add this amount to the basis amount.

4. Add any expenses generated from the sale to the property basis amount. These include real estate agent fees, advertising fees and documentation fees. The resulting number is the final adjusted basis.

5. Review your tax returns from the years you owned the property. Add all depreciation write-offs you previously claimed for the property. Subtract this amount from the total sale amount. Bear in mind that if you have owned the property for a number of years this subtraction may make the adjusted tax basis lower than you think, causing you to have a tax gain instead of a loss.

6. Subtract the sales price form the adjusted basis to get the tax write-off amount.

7. Locate or request form 4797 from the IRS. This is the form used for the sale of business property. Enter the calculations you made in the appropriate form boxes.

References

• Smart Money: Tax Breaks for Losses on Rental Property Sales Tax Breaks for Losses on Rental Property Sales
• IRS.gov: Sale of Residence - Real Estate Tax Tips
• IRS.gov: Ten Important Facts About Capital Gains and Losses

Resources

• IRS.gov: Form 4797