Selling a rental property for less than it's worth

Tax, SDIRAs & Cost Segregation
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Selling a rental property for less than it's worth

Jon Haney
Investor · Radford, VA · Member since 2021 · 25 posts · 3 votes

Hi, quick question about selling a rental property for less than it's worth and tax implications.

I purchased a rental property on 9/1/2022 for $40k, paid $4k in closing costs, and over the course of 2023 paid around $4000 for upkeep and security on the property. 

I was planning to renovate and rent out, but squatters unfortunately became a nightmare and I decided to offload the property. I sold it on 9/22/2023 for $29k. 

Here's my question: Do I qualify for a tax deduction considering the substantial loss on the property? I've read online that this applies only for rental properties that are in possession for at least one year—I'm guessing I qualify?

Thanks for any and all help,

Jon

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2y

Id hire a tax guy because I’m pretty sure they’ll find a way to deduct at least some of it. You have somewhere between an $11k and $19k loss. But don’t forget with the high standard deductible this may not add up to much, especially if you’re married. 

If you have super basic taxes other than this, I would expect $100-$200 tax bill and you’ll know for sure if you can legally get some of that money back. Good luck. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    Id hire a tax guy because I’m pretty sure they’ll find a way to deduct at least some of it. You have somewhere between an $11k and $19k loss. But don’t forget with the high standard deductible this may not add up to much, especially if you’re married. 

    If you have super basic taxes other than this, I would expect $100-$200 tax bill and you’ll know for sure if you can legally get some of that money back. Good luck. 

    2Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    2y

    @Jon Haney I don't believe the length of ownership is at all a factor. It is a capital loss if you sell for less than your basis. But clearly you should talk to a tax professional. 

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    It looks like you have a business loss which you can use to offset other forms of income.

    I don't think you sold it less than its worth, you likely tried to get as much as you can.
    Squatters decrease the value of a home, especially if you are selling the house with them in it.

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  • Jonathan Bock
    Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes
    2y

    Treated as ordinary loss another great perk of real estate  ....

    @Michael Plaks do have a forum link to explain this wonderful benefit of losing money in REI ?

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Jon Haney

    Well, @Basit Siddiqi has already weighed in that its probably a business loss.

    But to add my 2cents if it helps, since it was never rented I guess its like a flip and you can claim a $19k loss --- sold for $29k but your cost basis is $48k.

    Otherwise, its just a sold property / capital asset so your schD would show a $19k long term capital loss.  It would be great if you had any gains with which to offset them.  Otherwise, you can take $3k a year onto your main 1040 until its gone...

    Definitely consult a professional.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Jonathan Bock:

    Treated as ordinary loss another great perk of real estate  ....

    @Michael Plaks do have a forum link to explain this wonderful benefit of losing money in REI ?

    I don't have any forum links, but I used to teach a class on "Losing big money in real estate."

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Jon Haney:

    Hi, quick question about selling a rental property for less than it's worth and tax implications.

    I purchased a rental property on 9/1/2022 

    This is actually controversial.

    See, you already labeled it a "rental property" - but it is only one of 3 possible ways to interpret your situation:
    1. Rental property
    2. Buy-and-sell property, aka flip
    3. Investment property

    All 3 allow you to claim a loss, but they have different tax consequences: some allow for an immediate loss, and others may force you to recover it over multiple years.

    The questions is not which one is better for you but which one is the most accurate. It is case-by-case and requires a thorough discussion with a tax pro. Don't be surprised if you talk to two of us and receive two different opinions. As I said in the beginning, this is not black-and white.
    1Reply
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