Feb 17, 2011

No, You Can't Deduct Losses on the Sale of a Home

This myth has been busted a zillion times, and yet it persists -- maybe because taxpayers believe that the tax code should make logical sense. If you have to pay capital gains tax when your profits on the sale of a house exceed the $250,000 (or $500,000 per married couple filing jointly) exclusion, then why shouldn't you be able to apply your losses on a  home sale against any other capital gains?

image_3_Thumbnail.jpgOops, looks like I boxed myself into a corner where I now have to explain this. The short of it seems to be that a house is considered "personal property" by the IRS, and personal property gets special treatment -- and not the good kind of special. You pay taxes on the gains from the sale of personal property, but get no benefits from the losses. (Perhaps they're trying to avoid having people take massive deductions for every item sold cheap at a garage sale.)

Worse news yet, if you had to sell your house for so little that your lender needed to forgive some of your debt (as with a short sale or a deed in lieu of foreclosure), the IRS may try to collect tax on the amount of the forgiven debt. The reasoning is that it's almost like your lender handed you a check, which is income -- never mind that you then handed it back to the lender. But don't panic: You may qualify for relief under the Mortgage Forgiveness Act, described by the IRS at www.irs.gov/newsroom/article/0,,id=205004,00.html