Home-sale loss doesn’t count as a tax deduction

We have heard all about prices slowing -- even dropping -- in some regions of the country.

One reader recently wrote that “at least the loss on my home sale will give me a tax break.” Not so.

Most homeowners understand that they can pocket up to $500,000 of tax-free capital gain ($250,000 for single people) on the sale of a primary residence. That huge benefit, which can be used every two years, was made possible by the Taxpayer Relief Act of 1997.

However, the tax law that provided this break did nothing for capital losses. There still is no benefit for folks who bought at the peak or made expensive remodels, had to sell in a hurry and got less for their home than the cash they invested in it.

Long-term capital expenditures usually pay off over time, but changes for the short term are difficult to recover. If you are selling at a loss and hoping for some help, don’t count on chalking up a capital loss as a fat tax deduction.

Uncle Sam will not let you show a loss if you sell for less than the purchase price.

The principal residence has always been viewed as a personal asset. The gain on the sale of a principal residence has been taxable as a capital gain, but losses have never been allowed. Although the capital gain thresholds have been increased, proposals to address capital losses have been defeated.

The confusion surfaced again a few years ago when a proposal to allow tax deductions for losses on the sale of a principal residence failed. The capital loss proposal stemmed from complaints by homeowners in the Sun Belt and New England who said they were left with huge losses and no federal tax help when home values plunged during the 1990s.

Tom Kelly, former real estate editor for the Seattle Times, is a syndicated columnist and talk-show host. Send questions to news@tomkelly.com.