Selling Investment Property At A Loss

Selling an investment property you inherited at a loss may not give you any tax benefits.

Q: I purchased a townhouse with my aunt five years ago. She passed away last year, and I want to sell it. We paid cash for the house and now the home is worth about 35 percent less than when we bought it. I don’t want to rent it. If I sell for a loss, can the difference be a write off on my taxes?

A: If you purchased the townhouse as an investment, your loss might be a write off on your federal income taxes. However, it sounds as if the townhouse was not used as a rental but perhaps lived in by your aunt.

If you and she both owned the property and she used it as her primary residence, her share of the home would not be an investment in real estate and could not be deducted from her real estate taxes.

However, your share might be considered an investment. If your share is an investment, you might have the ability to take the loss. But your situation might be a tad complicated so you might want to talk to an accountant.

If you didn’t treat the purchase of the townhouse as an investment in the past, your tax returns would not show your purchase in past tax returns as an investment. As such, it might be questionable whether you owned the real estate for investment purposes or were just helping your aunt with the purchase of her home.

Here’s something else to consider: There may be tax considerations from your aunt’s estate and other issues relating to your own federal income taxes.

If you sell the property now, the tax situation will be different for your aunt’s share of the property as well as your share.

In addition, even if you inherited and now own your aunt’s share of the home, the sale may still result in different tax consequences for her share and your share depending on whether your share can be considered an investment property.

Please discuss these issues with a qualified tax preparer, either a CPA or an enrolled agent.


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