The news is so conflicting. Record real estate values in some areas. Over 40 million Americans looking at eviction. Eviction stays mean Mom & Pop landlords are forced to pay property tax, insurance, repairs and HOA dues with no income. The mortgage might not be currently due, but it’s not forgiven.
Markets are up. Markets are down. It’s hard to predict the future for real estate values.
One of the questions I’m getting frequently now has to do with timing of when to sell. Or even IF they should sell.
As a tax advisor, I can’t help you decide when or if to sell, but I can help you figure out the tax strategies that will work best for you.
Today, we’re going to look at what to do if the property being sold has gone down in value.
What If Your Real Estate Investments Have Gone Down in Value
If you have a rental property, either a long-term rental or an Air BnB, the loss on a property you may be able to use the loss to offset other income that you have. If the loss is more than your income, the loss carries forward to be used against other income.
There is one possible issue with real estate loss, though, that could happen with long term rental property. Here’s how it works.
If you are a real estate professional and have been taking real estate losses (usually because of depreciation) against other income, you probably have made a special election called an “aggregation election.” This lets you combine your real estate properties into a group so you only have to pass a “material participation” test once. If you don’t make that election, you have to pass the test for each property.
The test means more hours of work on your properties and it’s a hassle to track. That’s why most real estate professionals will make an aggregation election.
But there is a potential problem.
If you have a real estate loss when you sell a property that is part of an aggregated group, the loss can’t be used to offset your current income. It has to be used against income from other properties in the group. If you don’t sell another property in the group at a profit right away, the loss just carries forward.
If all the properties in the group sell and there is still a loss carrying forward, you can then finally use that loss to offset other income.
There is a strategy you can take to de-aggregate the group first so you don’t have this issue. Make sure your CPA is experienced with real estate tax law, particularly the nuances of real estate professional status.
What if your home has a loss?
It’s a little trickier if it’s your principal residence that has a loss. Unlike with real estate rentals, a loss when you sell your principal residence isn’t deductible.
As an example, let’s say that you bought your home for $400,000. With the downturn in the real estate market, you need to sell it now. All you can get is $300,000, plus there are $20,000 in costs you have to pay when you sell. All told, you have a loss of $120,000. If that had been a real estate investment, the loss would have been deductible.
One strategy for a personal home that has gone down in value is to first to rent it to convert it to a legitimate real estate investment. THEN sell it at a loss.
No one wants to lose money on an investment. It’s even worse if you can’t even pick up the real estate loss on your tax return.
Are you selling your home? Here are some other articles you should read.