Selling a rental unit. Can I claim a loss?

Question

In 2010, I purchased my single family residence and thought I was there to stay.  In February 2012, I was relocated out of state.  Due the still poor real estate market I elected to rent my home.  I want to sell the property at the end of the 2 year lease in July 2014.

I know the property is not worth near what I bought it for in 2010.  Can I claim that as loss for tax purposes?   My CPA told me I could not because I have not used this as a rental long enough, but was unsure how long I would have to own it to be able to claim the loss.

David Beard · Answer

Steve, forums can be lousy venues for talking about detailed tax issues. Forget the three years, means nothing in your context. It has to do with getting a capital gains tax exclusion on a GAIN from your personal residence, which states that you have to have lived in the property 2 out of the past 5 years. You have a LOSS on the house. You will not be able to write off the loss from selling, its just not happening based on what you've described. The IRS is irritating but not stupid enough to allow someone to convert a property when FMV is below their original purchase, and then conjure up a tax loss, surely that makes sense.

Sell the house. Its a lousy investment property with a low yield. Of course it cash flows without a mortgage, this means nothing. The yield is simply too low relative to a solid rental property. You should target 8-12% net yield on a rental. Time to eat the loss and move on. Hopefully you'll buy right in the future. Good luck.

Sell the house.  Its a lousy investment property with a low yield.  Of course it cash flows without a mortgage, this means nothing.  The yield is simply too low relative to a solid rental property.  You should target 8-12% net yield on a rental.  Time to eat the loss and move on.  Hopefully you'll buy right in the future.  Good luck.

Wayne Brooks · Answer

John, more importantly perhaps is now that you have turned it into a rental, you may have a large tax bill from the forgiven debt, if you do a short sale.  Once it becomes a rental, you lose the MDRA primary residence exemption from income taxes payable on the forgiven debt.  And remember, the tax liability on the forgiven debt is Ordinary income, verses a capital loss for a reduced sales price, that may be limited in annual deductions.

Steven Hamilton II · Answer

@Steven Maye,

The Fair Market Value is EXTREMELY important.  We need to know that even if you estimate it from Zillow or contact a realtor to give you an idea.

No, it was stated that with three years of depreciation your numbers could shift immensely as to whether gain or loss.

Consider a line of credit on it as long as it will still cash flow.  Or sell it, and move on the to the next one.

Steve Maye · Answer

@Steven Hamilton II

Hello Steve,

That would depend. What was the Fair Market Value when you converted it to a rental? Your loss would be based upon what was lower.

Your basis was $380,500. If Fair Market Value was lower at that time it would have been your basis for depreciation as a rental. Your gain/loss from there would be calculated. I suspect the fair market value was lower at the time of the conversion to rental as I paid too much to begin with during the time the market was falling.

Those costs will be deductible as your treat it as a rental; however, that would only be from your adjusted basis. I thought I was told above that the home had be used as a rental for a period of 3 years in order to claim a loss on my taxes.
	
	Is it cash flowing? If so why not keep it Can you refi? Can you get the bank to streamline the loan? Cash is flowing.  Making about 4%.  The property is fully paid for.  I was just looking at getting the money out of it.

Steven Hamilton II · Answer

Steve,

That would depend. What was the Fair Market Value when you converted it to a rental? Your loss would be based upon what was lower.

Your basis was $380,500. If Fair Market Value was lower at that time it would have been your basis for depreciation as a rental.  Your gain/loss from there would be calculated.

Those costs will be deductible as your treat it as a rental; however, that would only be from your adjusted basis.
	
	Is it cash flowing?  If so why not keep it Can you refi?  Can you get the bank to streamline the loan?

Steve Maye · Answer

@Steven Hamilton II

Update to the saga.  I decided to see if the renter wanted to buy the home.  He does and has made an offer.  I have a few questions.  Can anyone help?

• I paid $367,500 in 2010 for a personal residence
• I invested about $13,000 in it then
• I started renting it July 2012
• The renter's offer to buy is $328,000
• If I agree to his price there will be a substantial loss
• This home has only been a rental unit for about 1.5 years, so I guess I cannot claim the loss between what I paid and what I sell it for?
• There will be real estate fees and closing costs.  Can these be deducted on my taxes?
• Is there any other strategy I should be considering to minize my losses?

Steven Hamilton II · Answer

I would consider financing it to him at a higher price and lower interest rate.

Steve Maye · Answer

@Steven Hamilton II

I can have some backdated comps run.  I know I overpaid for the property back in 2010.  I suspect the backdated comps at the time I first rented it last year would be similar to now, so maybe there is nothing I can do about claiming the loss.  There is a good chance the current renter wants to buy the home.  I am sure at the current low market value.  I think he would also really like me to finance it for him.  Not so interested in financing him.

I am sorry, but I am not sure what you mean by pulling some cash.  Take out a first mortgage?

Steven Hamilton II · Answer

Sorry @Steve Maye , That was someone else's post that mentioned their property being under water.

It comes down to doing the math, as to cutting your losses.  Have you considered possibly pulling some cash from the property if it all possible?

What was it worth when you started renting it out versus what you paid for it? What is it worth now?

-Steven

Steve Maye · Answer

@Steven Hamilton II

I don't remember mentioning being underwater.   The reason this doesn't make sense is I have no mortgage on this property.  It is paid for. If I sell now I expect to lose about $69K (original purchase price - selling price).   Current ROI is only 4%.

Selling a rental unit. Can I claim a loss?

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