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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
IRS considers total transaction in sale of primary residence
Tax Talk

Loss on home sale not deductible

Dear Tax Talk:
I had a house on the market for $500,000. Someone offered to buy it from me for $495,000, contingent upon them selling their house (the asking price was $169,000). I said I'd buy their house for $157,000 -- eliminating the agent commission. So they bought my house and I bought their house. Then I sold their house for $149,000 three weeks later, taking a $20,000 loss when I include the agent's commission. Is the $20,000 loss deductible?
-- Eric

Dear Eric,
I'm assuming you're talking about your home and not an investment property. The issue is that in order to get near your asking price on the first home, you took on another property that wasn't worth its cost.

A loss on the sale of a personal residence is not deductible, while a loss on a transaction entered into for profit is deductible. Further, up to $250,000 in gain on the sale of your home is excludable from income if you lived in and owned the home for more than two years. In determining your tax consequence, the IRS would look at your overall position. Had you sold the original home for $20,000 less, you would have either excluded less gain or had a nondeductible loss on the sale of a personal residence. 

The fact that you acquired the buyer's home to increase your profit on the original home doesn't mean that the second transaction was entered into for profit. When you collapse the two-step transaction into one, your motivation appears to be the sale of your home. It is presumed that the sale of a home is not a transaction entered into for profit due to its personal nature. Accordingly, I don't believe the loss on the sale of the second property would be tax-deductible.

Bankrate.com's corrections policy -- Posted: Oct. 10, 2007
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