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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7098
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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We built a second home in 2009 as a potential home to retire

Customer Question

We built a second home in 2009 as a potential home to retire to this year and have been using as a week end retreat. We have decided we do not want to retire and live there but wonder what the tax implications are if we convert it to a rental house. We tried selling for 18 months but could not. If we could sell we expect to lose approx $400K. Can our expected loss be used to offset gains we may realize on our other retirement investments from 401K, IRA's, etc?Thank You , Cleve and Carol Tubbs
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Well, as it stands now, any loss on a second home would not be deductible at all, as losses on any personal use property is never recognized for tax purposes.

Unfortunately, turning the property into rental property won't solve the build-in capital loss that you have now either, as if you convert the property to rental property, it's tax basis becomes the lower of your original cost or the fair market value at the time of the conversion. However, converting the property to rental property has other advantages, namely that the rental income can offset the operating costs of the property, depending of course how much rental income you are able to generate. The mortgage interest plus real estate taxes are already deductible on your Schedule A for Itemized Deductions.

One other thing I'll mention is that captial losses are only deductible against ordinary income (such as retirement fund withdrawals) to the extent of $3,000. per year in excess of any capital gains, so those losses may not be "use against" the other income you mention from 401-K, IRA's, etc., as that income is ordinary in nature when it comes out of the retirement funds, so that income would be subject to the $3,000. limit previously mentioned.