Can I Claim a Loss on the Sale of an Investment Property?

According to the IRS definition, an investment property may be an actual real estate property or simply an investment holding, like stock shares or bonds. Regardless of the form that an investment property takes, if you sell a property for a gain during a tax year, you must pay taxes on the earnings from that sale. If you sell the property for a loss, though, the tax implications are more varied.

If you have a stock or other financial holding that sits in the red, it’s generally not wise to sell that stock until you know that it won’t recover. A losing stock can, however, serve as a means of offsetting your yearly income tax bill. Any stock that you sell during a year on which you lose money may be claimed as a capital loss, which lowers the amount of your income.

Like with stock and financial holdings, when you sell an investment property directly to another buyer at a loss during a tax year, you report the sale as a capital loss on your tax return. If that investment property goes into foreclosure before you sell it, however, and ends up being sold through the financial institution which issued the loan on the property, you must actually declare the difference between the sale price of the property and the balance of the loan as income if the amount for which the property sells does not cover the entire loan.

When you sell an investment property during a tax year, the company that issued the original property, generally a financial institution, must issue you a 1099-B, which shows the total gain or loss on the sold property. Not only can you claim this amount on your tax return, but you can also often claim any fees that you incurred in order to sell the property at a loss. If you paid broker fees to sell a losing stock, for instance, you can add the fees to the stock loss.

You may need to wait late into tax season to fill out your tax return if you have sold investment properties during a financial year, because 1099-Bs may not be issued until March. When you receive these forms, you must transfer the information to Form 1040, Schedule D to declare the capital loss. When filling out the form, pay attention to all instructions on the form, because the IRS limits the amount of capital loss you can claim in a tax year. That limit is $3,000 as of 2011. Additional losses can be rolled over and claimed on your next tax return.