You may have bought a piece of property back when the real estate market was hot with the idea of renting it. Then the real estate bubble burst and now you want to sell that property and you figure that claiming the loss on your income tax return may ease the pain just a little. But figuring out that loss isn’t quite as simple as subtracting what you sell it for from what you paid for it.
The key number in deciding whether you have a loss is your tax basis in the property. The starting point for figuring your tax basis is the purchase price of the property. You can add the cost of any improvements you made to the property to that number, but not if you wrote them off as deductions on previous tax returns. After that it gets tricky because you then have to subtract any depreciation you claimed on the property. If you’ve owned it for a long time, taking that depreciation away from your tax basis may actually leave you with a taxable profit, even though it may seem to you that you’re taking a loss.
If, after doing the math, you find that you actually do have a loss, and if you’ve owned the property for more than a year, you can use it to offset any type of income, including salary, interest, and investment gains, if you have any. If the loss is more than your taxable income, you have a couple of choices. You can carry the loss back two years and recoup taxes you’ve already paid, or you carry it forward for as long as 20 years, to offset income that could potentially be taxed at a higher rate.