taxes

Figuring tax losses on property sale

George SaenzQuestionDear Tax Talk,
We took a second (mortgage) out on our primary residence to buy a rental property. A job change made us move, so we had to sell the rental property for less than what we paid for it (our second mortgage). We'd like to take that money and instead of putting it back toward the second loan, rather use it as a down payment for a new primary residence in our new state. (We are currently renting out our original primary residence since the market leaves us underwater there.) Do we have to pay capital gains tax on the money from the sale of the rental since it's not really a gain?
-- Melissa

AnswerDear Melissa,
Many people mistake sales proceeds for gain on a sale of an asset. Because you own the rental free and clear, you stand to receive all the proceeds from the sale. Whether you repay the second mortgage with these proceeds does not change your taxable gain or loss on the sale of the rental. Because you are selling for less than your original cost, you will have a capital loss for tax purposes. In figuring your cost, you use the original cost including any amounts borrowed directly or indirectly to buy or improve the property.

Because it was a rental property rather than a personal residence, you can deduct the loss, which would be ordinary (i.e., not subject to the capital loss limitations). Use Form 4797 to report the loss. The tax deduction will help take some of the sting out of the loss. It is hoped your new home will appreciate enough so that you can repay the second mortgage, and if you keep it as your home for more than two years, the gain would be tax-free. That's like having your cake and eating it, too!

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.
 

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

News alert Create a news alert for "taxes"

advertisement

Show Bankrate's community sharing policy
          Connect with us
REFINANCE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed refi 4.01%  0.19 4.20%
15 year fixed refi 3.09%  0.08 3.17%
10 year fixed refi 3.16%  0.02 3.14%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.32%  0.02 4.30%
50K FICO-based HELOC 4.06% --0.00 4.06%
100K FICO-based HELOC 3.92%  0.01 3.91%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.81% --0.00 2.81%
48 month used car loan 3.04% --0.00 3.04%
60 month new car loan 3.24% --0.00 3.24%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 1.00%  0.02 0.98%
2 Year CD 1.19%  0.02 1.17%
5 Year CD 1.85% --0.01 1.86%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.73%  0.02 15.75%
Cash Back Cards 16.43%  0.02 16.45%
Low Interest Cards 10.98%  0.02 10.96%
 
Next
advertisement
DAILY TAX TIP NEWSLETTER

Get expert advice during tax season on tax preparation and tips for cutting your tax bill.

advertisement
Dec. 31 will be here before you know it, so take some time now to make year-end tax moves that could lower your 2014 IRS bill.
Partner Center
advertisement

Connect with us