How to Sell an Investment Property for a Loss

Selling an investment property for a loss will give you a tax write-off directly against your income.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Calculators
• Tax Consultants
• Calculators

1. Calculate your "basis;" this is the base variable used to calculate the gain or loss on the sale of a property. Your original basis is comprised of the property's purchase price plus the buying expenses (non-recurring escrow costs such as title insurance, escrow fees, recording fees, transfer taxes, commission, tax service, deed preparation, credit report, appraisal fee and termite inspection) upon acquisition.

2. Calculate your adjusted basis. The adjusted basis is the original basis plus improvements made to the property while you've owned it.

3. Sell the property. With an all-cash transaction the tax event occurs in the year the property is sold.

4. Calculate depreciation. (According to the I.R.S., every asset has a useable life, and the amount of depreciation is calculated according to the life of a certain asset. Consult with the I.R.S. or an accountant/C.P.A. to determine the correct amount of depreciation you should use.) Use the total amount of depreciation taken on tax returns for the total time the property has been held.

5. Calculate the expenses of the sale. Expenses include real estate agent commission (if any) and any other expenses directly associated with the sale of the property.

6. Add the expenses of the sale to the adjusted cost basis. This is your new adjusted basis.

7. Add the total depreciation to the sales price, and subtract from the new adjusted basis. This is the amount of your loss.

8. Assure yourself of a loss by calculating that the adjusted cost basis of the property plus the expense of sale will be greater than the gross sales price plus all depreciation.

9. File I.R.S. form 4797, Sale of Business Property.

Tips & Warnings

• Points are not deducted as a buying expense, but are amortized over the life of the loan.
• Properties held for investment must have been used for personal use less than 14 days throughout the year.
• There are other ways to sell investment property, such as through an installment sale or an exchange. Consult a C.P.A or exchange facilitator for assistance. These selling options are complicated and require the assistance of a trained professional.
• Sometimes a seller will agree to pay a certain number of the borrower's points for obtaining a loan. When a seller pays points for a loan, they are considered to be selling expenses (just like a commission) and can be added to the adjusted cost basis.
• In order to include certain selling costs, such as repairs required to sell the property, these costs have to occur within a specific period of time before the sale to qualify. Check with your accountant or C.P.A.