Before You Take a Loss on Real Estate Investment Property

This post is in: Real Estate


We’ve done a full week of real estate tax-related blogs and only scratched the surface of the intricacies of real estate tax issues.

Today is a shorter article, but may be the most important one. If you have a loss on your real estate, there is something you can do that can turn a $3,000 loss per year into being able to take all of the loss in your first year.

This is especially important if you have debt forgiveness on the bad real estate.

Here’s what can go wrong:

You pay $200,000 for property that is now worth $75,000. That means you have a loss of $125,000.

You had bought the property with zero down, so there is debt of $200,000.

That means you also have debt forgiveness of $125,000.

The COD income of $125,000 is cancelled out by the real estate loss.

That is, it is cancelled out IF the property had first been put in service.

You could instead have purchased property that you hung on to, hoping it would go up in value.

This property would then be subject to capital gains or capital loss rules.

So, let’s assume all the same information. You paid $200,000 for the property. You have debt of $200,000 and it’s now worth $75,000.

You walk away and have a loss of $125,000 and COD income of $125,000. The COD income is all immediately taxable, but the loss is only available at $3,000 per year.

You’ve got some major tax to pay.

There is one big tactic you could take to make this all change. Put the property in service first! That changes the capital gain/loss property into ‘put in service’ property which gives you an immediate loss deduction.


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  2. Jeanne says:

    When you “convert” a property from personal to business you have to reduce the value to the lesser of cost or FMV. Of course if you buy it as business property then you use the cost but if you hold it as personal and then convert it you have to look at both the cost and the FMV upon the conversion.

    You might be able to get some loss but then you would have to hold it for a period between the conversion and the sale.

  3. Diane Kennedy says:

    Jeanne, I’m not sure what you’re referring to. If you have a property that you put in service, you can then depreciate the depreciable part of the asset. It doesn’t matter what the FMV of the property is, when it comes to depreciation.

  4. Jeanne says:

    But you have to reduce the asset to FMV when you put it in “service” so what’s the point?