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Tuesday November 12th 2019

Deductible Losses on a Rental Home

Many people are facing losses on real estate sales, made to get out from under a weighty mortgage. This begs the questions, if you pay tax on real estate gains, do you get a break from real estate losses? The answer is logical, but only after you understand how gains on real estate are taxed.

Capital Gains Tax

The IRS does not always charge you taxes on capital gains. If you profit by $250,000 as a single seller, or $500,000 as a couple, you do not have to pay capital gains tax. You only pay for profits above those amounts.

Therefore, the logic follows that you would not get a break if you lost money on the sale of your home. However, exceptions do exist for those who sell an investment property. What qualifies as such a property? Any real estate that brings income qualifies, such as a rental house or vacation home that you rent out part of the vacation season.

How Much Can You Deduct?

The IRS lets you deduct losses up to specific amounts. Depreciation is also deductible, which can really muddy the waters when figuring your taxes. For this reason, it’s best to talk to a tax professional to figure out exactly how much you can deduct. Claiming losses on investment property requires a completed IRS form 4797.

When selling a second home, you generally pay taxes as long-term capital gains for properties owned over one year or short-term capital gains one homes owned less than one year. If you would pay capital gains on a profit from the sale in these situations, then you would be able to deduct a loss.

Don’t Think of it as a Second Home

When you think of the rental property as a “second home,” you muddy the waters. The IRS allows certain deductions on a second home, but they do not allow deductions on losses for these properties. The difference is the purpose of the property. Is it truly a “second home” or is it an investment? Are you earning income from it?

Dealing with Depreciation

Most people who rent out a property take depreciation every year. When you sell the property, that depreciation counts against the value of the property, reducing your tax-deductible loss. The good news is that the loss is deduct-able as an ordinary loss, deduct-able in full against the income. Limits apply and you must also address the issue of passive losses. This complicated topic definitely requires the help of a tax professional.

Tips for Settling Back Taxes

If there is one inescapable truth, it is that the IRS will always get what is owed to them. Being in debt to the IRS is no laughing matter. Owing back taxes can ruin your finances for years and even decades. The best way to settle back taxes are to avoid them all together. There are a number of different ways to pay off what you owe to the IRS. The best decision you can make is look at all the advantages and choices at your disposal before choosing a path towards repayment.

Partial Payments

The way most people pay off their back taxes is through monthly partial payments. This choice works in your favor only if you can make the necessary payments on-time each month until the period of time you and the IRS agree upon has ended. In some cases, people have been able to get away with paying less than they originally owed the IRS. However, you could face a great deal of trouble should you miss a payment. Be certain you can handle the amount before agreeing to a payment plan.


An Offer-in-Compromise is probably the best way to settle back taxes. You simply offer what you can afford to the IRS and they choose whether to accept or reject your offer. The closer you are to the amount you owe the better chance there is the IRS will accept your offer.

If you can offer at least eighty percent of the original amount then you should be fine. The IRS will review your financial standing and liabilities before accepting your offer. Should the IRS find you could afford the full amount they will likely reject your offer even if it is ninety-nine percent of the original debt owed.

Penalty Abatement

There are two other alternatives for those significantly financially strapped. The first is known as penalty abatement. Penalty abatement is a request you can make to have the IRS completely drop all your tax penalties. The IRS will conduct an in-depth search of your financial standing to see if you are as bad off as you say you are.

After reviewing your financial status, the IRS may eliminate your tax debts altogether. Requesting penalty abatement generally knocks off a good chunk of IRS debt, if it is accepted. If you think you have a case for penalty abatement, you should speak to your tax preparer immediately.


Lastly, should your tax problems get bad enough for the IRS to threaten seizure, you should file a Tax Collection Appeal. This will allow you to tell the IRS your financial well is dry and you cannot possibly pay your taxes. The appeal will go to an appeal officer who will look at your financial standing and make a decision in about a week.

Now that you understand what some of your options are you should be better equipped to handle the stressful task of settling your back taxes. Hopefully, you will be able to go back to avoiding back taxes altogether in no time.