Your Taxes: Selling a home that's "under water"

November 7, 2007

It's a scenario no homeowner wants to face: selling at a loss. However, it's become reality for a lot of people who bought at the high end of the market but are now forced to sell during a housing slump, because of, say, a divorce or downsizing.

It's a scenario no homeowner wants to face: selling at a loss. However, it's become reality for a lot of people who bought at the high end of the market but are now forced to sell during a housing slump, because of, say, a divorce or downsizing. Worse, because the IRS doesn't consider a primary residence an investment, you can't deduct the loss. Although it's not a short-term solution, a way around this is to rent out your home, suggests David K. Sebastian, a financial planner in Parsippany, NJ. If you can prove your house was permanently converted to a rental, you'll be allowed to deduct the loss as a capital loss on your tax return. A recent Tax Court decision permitted a deduction after a 90-day rental, but tax experts advise longer-term leases to pass IRS muster. The devil is in the details, of course, so see your accountant first.