As part of the “fun” that comes with packing up and moving across the country, my family and I are going to have to sell our house. One of the unfortunate realities of the situation is this: There is a chance that we will need to pay up to $10,000 out of our pockets to make this happen.
Between home values in my neighborhood (we bought near the top of the market), broker fees, and other closing costs, there is a chance that we won’t be able to get enough to pay off the mortgage and pay what else we’ll owe. It’s all sorts of good times here.
When I mentioned this reality to one of my acquaintances, he suggested that I take a capital loss deduction for selling me home. I looked at him funny because I had never heard of such a thing. “I’m not sure I can do that,” I said. “I don’t think the IRS allows it.”
My acquaintance was so adamant that I could take a capital loss that I came home and researched the issue. Unfortunately, I was right. Your personal residence doesn’t “count” when it comes to deducting capital losses.
Capital Losses Don’t Apply on a Personal Residence
Your primary residence won’t help you when it comes to selling at a loss. While the IRS does expect you to report a capital gain when you sell your home (the good news is that your gains are excluded from taxation up to a certain point), you don’t get a tax deduction for your losses. Instead if you lose out, you lose out. Part of that reasoning probably has to do with the fact that you might have been eligible for a mortgage interest tax deduction all this time.
The story is different when you sell a rental property at a loss, however. If you are selling property related to your business, or that is a true investment property, and you lose money, you might be able to deduct your capital losses. (You should also have been able to deduct other costs related to owning a rental as well.) You should talk to a knowledgeable tax professional to work out how to go about this process.
It’s also worth noting that if you do end up paying capital gains taxes on your home, they are usually eligible to be offset by capital losses elsewhere. So you can reduce the amount you owe if you have capital losses from the sale of other investments. Again, it makes sense to consult a tax professional before you proceed.
When dealing with home-related expenses, losses, and tax issues, it’s always best to assume that the IRS considers your primary residence more as a personal item than anything else. While you might be able to deduct the interest paid on your mortgage, and you might get a deduction for property taxes, it’s important to understand that you won’t get a deduction for what feels, to you, like a capital loss if you lose money on a transaction.