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Can a loss on one house offset the gain on another?

August 25, 2008


From:  Don
Date:  Tue, 19 Feb 2008

I owned three "investment" houses. I sold one of them in December 2006, for a loss of $292,000. Iím now in the process of a "deed in lieu" or "short sale" on the other two.

  1. Can the $292,000 loss be used to offset the potential income of $190,000 from the deed in lieu or short sale of the other two?


  2. Can my investment of $108,000 and $191,000 in the two investment houses be used to offset any tax liability when they are short sold or transferred back to the lender?

Answer

Date:  19 Mar 2008

Hello Don,

  1. Possibly. If the nature of the investment was that the property was rental property, the loss would be a Section 1231 loss. Any Section 1231 loss in excess of Section 1231 income is deductible as an ordinary loss, which could make it available for a net operating loss carryover or carryback.


  2. Assuming the loans are recourse loans, the houses will be considered to be sold at fair market value (or actual short sale amount). Tax basis will be used to determine any gain or loss relating to the sale of the houses. If sold at a loss and the houses were rental houses, you might have Section 1231 losses that can be offset against ordinary income.

If you donít understand these rules, you should invest in getting help from a professional tax advisor familiar with real estate. (Thatís our business!)

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Can a loss on one house offset the gain on another?

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