For most people and small businesses, transactions involving real property are often the most substantial transactions that they will experience over the course of their lives. When you sell real estate for less than you paid for it, you might feel embarrassment that discourages you from reporting your loss to the IRS.
As a taxpayer, you must disclose all substantial real estate transactions in the appropriate tax filings, even if you lose money on that transaction. However, you should know that you could actually benefit from disclosing this information. This is because the Internal Revenue Code allows for taxpaying individuals and businesses to receive tax deductions for capital losses on certain real property.
The experienced California real estate tax lawyers at NewPoint Law Group, LLP are ready to help. We can provide tax preparation services to help you reduce your liability and represent you in the face of a government audit to help you stave off costly penalties. To hear more about our services, give us a call today at 800-358-0305.
How to Calculate Capital Loss on Real Estate
The first step that you must take for reporting guidelines on your real estate dealings is to determine whether you have a reportable loss.
First, compare the gross proceeds of the sale to the amount listed on your Form 1099-S to make sure that they match up. Second, find the basis for the property by finding documentation of the price you originally paid for the property. You can add the value of any long-term improvements that you made to the property. You can also include government improvements to the surrounding area. Third, subtract any depreciation to the property or tax credits you have received while on the property.
Once you have determined whether you have sustained a capital loss, you can then complete IRS Form 8949, “Sale and Other Dispositions of Capital Assets.” In this form, you must provide information about the property, its purchase and sale dates, and alterations to the basis. You will also use the information from Form 8949 on Schedule D of your tax return, which is how you report your capital loss to the IRS.
When Do You Benefit from Reporting Capital Losses on Real Estate?
Reporting a capital loss can have positive tax reduction effects on your return in certain circumstances. If you report a capital loss on the sale of real property from a home that you lived in, you are not eligible for a capital loss deduction. However, if you sold property held as investment or for business purposes, you may be able to claim additional tax deductions.
For instance, if your small business sold a commercial space that the business used for more than one year, the business can claim a deduction. If you owned a property that you rented out and derived income from for over a year, you may also be able to claim a deduction.
These deductions are available to taxpaying individuals and businesses through Section 1231 of the Internal Revenue Code (IRC). Section 1231 deductions can be used to account for losses on many forms of property, including real property, that is used in trade or business or held for more than one year in connection with trade, business, or a transaction entered into for profit.
For instance, if you purchase a home for your family, no matter how long you own it, you did not purchase the home in trade or business or enter into the transaction for profit. However, if you purchase a property and rent it out to customers for profit over the course of your ownership, that property would fall under the types of capital assets covered by Section 1231.
For the reasons above, it can be helpful for your bottom line to report capital losses on real estate. However, it is important to conduct the process of claiming your capital loss correctly. If you claim too little of a loss, you will miss out on the tax deductions that you are rightfully owed under the IRC. If you claim too much, you open the door for invasive government audits and even tax code violations that can carry substantial penalties. Speaking with one of our experienced California real estate tax attorneys can help you avoid these problems.
Can You Convert Your Primary Residence to a Rental Property for Deducting Capital Losses in California?
Many taxpayers hope to claim deductions on real property capital losses by claiming that they converted their primary residence to a rental property before the sale or claiming losses of the entire property by saying that they rented out a portion of the property, such as a spare room.
Avoiding the personal residence rule is not quite this simple. If you used the property for rentals for some of the time that you owned it, you can only claim deductions for losses in value over the time that you were renting the property. If you rented out a portion of the property, you can only claim losses on depreciation of the specific part of the property that you rented out, rather than the property as a whole.
Determining losses on a parcel of the property is complicated because you must portion out the value of the rental parcel in comparison to the rest of the property, as well as the added value of any improvements made to the property as a whole. If you are hoping to claim a partial deduction, we recommend that you speak with one of our Folsom real estate tax lawyers first.
Talk to NewPoint Law Group, LLP About Reporting Capital Asset Losses on Real Estate in California Today
The tax code is complex and undergoes constant changes. Fortunately, the Elk Grove real estate tax lawyers at NewPoint Law Group, LLP stay up to date on these developments so our clients can benefit from our experience. Call 800-358-0305 today to hear more.