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?
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.