Key Takeaways
- Consider the long-term financial effects of selling a rental property at a loss.
- Assess the current market conditions and your personal financial situation.
- Consider alternative options such as renting out the property for a longer period or making repairs/renovations.
- Consult a financial advisor or tax professional for guidance on the tax implications of selling a property at a loss.
- Make a decision based on your overall financial goals and risk tolerance.
Investing in real estate in California can lead to good profits. However, there are always risks involved with real estate investments. One of those risks is the property losing some of its value and becoming more than you care to deal with.
If you own a rental property that’s becoming a drain on your finances, you might be considering selling a rental property at a loss.
While this may initially seem like something you shouldnāt do, it isnāt all bad news. Selling rental property at a loss does have some advantages.
We’re going to look at some of those benefits and how you can navigate selling investment properties at a loss if it’s a serious consideration.
Can You Sell an Investment Property at a Loss?
You can sell any house you own at any time, whether for a gain or a loss. However, if you own investment property, there are certain times and situations when selling at a loss could be better for you.
If you’re unsure of your investment strategies or tax situation, we recommend talking with a professional, like a real estate agent, lawyer, or accountant, who can give you the best, personalized advice.
Unsure About Selling Your Rental?
Get cash quickly for your California rental property by selling to professional cash home buyers. Hassle-free process with no need to deal with tenants or real estate agents. Guaranteed offer in 48 hours and close the sale in 7 days. Request your offer now and move on to your next venture without delay.
When to Sell an Investment Property at a Loss?
While your circumstances will vary greatly depending on your investment situation, here are some of the most common times to sell a rental property at a loss:
How to Calculate Capital Loss on Investment Property?
Calculating your potential loss on a sale of an investment property can be done in just two simple steps.
Here is a simple example to consider.
Mark and Amanda purchased an investment property in California for $500,000. They added some capital improvements that totaled $50,000. This gives the property a cost basis of $550,000.
While they had planned to keep the property for a long-term investment, their plans have changed, and they need to sell the rental quickly.
They accept an offer and end up with an adjusted sales price of $525,000. After subtracting the cost basis from the adjusted sales price, Mark and Amanda have a loss of $25,000. That loss can potentially be used as an investment real estate loss tax deduction.
Offset Capital Gains with a Loss
Some investors use a strategy called tax loss harvesting. This involves offsetting a capital gain with a loss, so you do not have to pay taxes on your capital gains.
Some Investors use a strategy called “tax loss harvesting.” This involves off-setting a capital gain with a loss, so you do not have to pay as much on your Capital Gains.
Doug & Andrea Van Soest
An example of this would be if you sold stock and gained $50,000, you could sell a rental property for a loss of $50,000. This would set your capital gains tax to $0.
Consider a Loss Carryover
The IRS does limit capital loss deductions. If your capital losses exceed your capital gains, you can only claim an excess loss of $3,000. If your loss is more than that, you can use a loss carryover to push it forward into another year.
As an example, letās say someone sold a rental property at a loss of $7,000. They had no other capital gains or losses. They can claim $3,000 as a loss deduction for this year and save the remaining $4,000 for future years.
Unsure About Selling Your Rental?
Sell your rental property in California for cash quickly and easily. As professional cash home buyers can give you an offer in 48 hours and close the sale in 7 days, without the stress of uncooperative tenants or the hassle of using a real estate agent. Request your offer now and move on to your next venture.
Effects of Depreciation Recapture
One consideration for selling property at a loss is depreciation recapture. The IRS allows investors to deduct a certain amount of depreciation from their taxable income. Most U.S. properties use a depreciation rate of 3.636% over 27.5 years.
You can deduct 3.636% of your basis in the property each year. However, when you sell the property, even at a loss, you may have to pay a depreciation recapture. This happens when the property sells for more than its depreciated value.
For example, if you reported a rental property with a depreciated value of $475,000, but then it sells for $480,000, you may have to pay a depreciation recapture tax on the $5,000 difference, even if your cost basis was higher than the sale price.
Learn More: Handling Taxes on the Sale of Your Rental Property
Why Can’t I Deduct my Rental Property Losses?
There are certain circumstances where you will be unable to deduct your rental property losses. The IRS considers rental losses as āpassive losses.ā Passive losses can only be deducted from passive income, not the income you earn from a full-time job or other active income streams.
The IRS considers rental losses as “passive losses.” Passive losses can only be deducted from passive income, not the income you earn from a Job.
Doug & Andrea Van Soest
Passive income is income from real estate investments and other activities that require less than 750 hours of your active participation each year. If you do not have any other sources of passive income, your losses from selling rental property are suspended until you have another source of passive income.
The passive loss carryover on your rental property sold can be applied to future tax years.
There are two exceptions to the passive loss rules:
If you’re a real estate professional, you’re completely exempt from passive loss. However, you must spend over half of your working time with your real estate business and properties. It requires at least 751 hours a year.
If your adjusted gross income is $100,000 or less, you can deduct up to $25,000 in real estate losses. However, you must āactively participateā with the property. This means you help make management decisions and have at least a 10% ownership interest in the property.
This allowance gradually declines with an income over $100,000 and is eliminated after $150,000.
Unsure About Selling Your Rental?
Get cash quickly for your California rental property by selling to professional cash home buyers. Hassle-free process with no need to deal with tenants or real estate agents. Guaranteed offer in 48 hours and close the sale in 7 days. Request your offer now and move on to your next venture without delay.
An Easier Way to Sell Your Rental Property
Selling a rental property in California at a loss can have significant financial consequences, and it is important to carefully consider all factors before making a decision.
It’s important to weigh the long-term financial effects, assess current market conditions, consider alternative options such as renting out the property for a longer period or making repairs/renovations, and consult with a financial advisor or tax professional for guidance on the tax implications.
Ultimately, the decision to sell a rental property at a loss should be based on your overall financial goals and risk tolerance. It’s important to remember that there is no one-size-fits-all answer and it’s critical to make a decision that is best for your specific situation.
Learn More:Ā Selling a Rental Property with Tenants in California