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Capital losses on home sale

Chris Farrell Nov 10, 2008

Question: My wife and I were fortunate enough to sell our home in North Minneapolis last May, but we did end up bringing our checkbook to closing. We sold our house for a bit less than we owed. We were told at the time by a couple of professionals (a CPA and an investor) that we cannot write those losses off when we do our 2008 taxes. I was wondering if any of the bailout plan signed by congress and the president changed any of this to favor us, or if you see any chance that someday we could get a kick back for our loss? Thanks! Andy

Answer: The information you got from the CPA and an investor is right: Any loss from the sale of your main residence can’t be deducted on your tax form come April 15.

Of course, tax cutting is high on the legislative agenda with a new President and a new Congress confronting a recession that’s getting worse by the month. A hodgepodge of ideas is in circulation. The more popular proposals include suspending mandatory distributions from 401(k) plans and the like for those 70½ and older, allowing taxpayers to take out as much as $10,000 penalty- free from their retirement accounts (you’d still pay taxes on the withdrawal), getting rid of income taxes for seniors making less than $50,000 a year and allowing a 10% mortgage tax credit for any homeowner that doesn’t itemize.

The notion of allowing homeowners to take into account capital losses on sales usually gets short shrift. It’s a concept that gets a hearing every time there’s a downturn in the residential real estate market. But homeownership is already such a tax favored investment that even the housing-and mortgage-friendly Congress has rejected this tax initiative in the past.

I can’t handicap the odds, but the traditional avoidance of capital losses on home sales could weaken. For one thing, the idea of allowing homeowners to take capital losses has been making the rounds in the blogosphere. For another, there is a growing sense that the federal government needs to direct more aid to homeowners and less to financial institutions. For example, reading the Washington Post this morning I learned that Treasury Secretary Henry Paulson had–with little comment–changed the tax law to eliminate strict limits on the losses banks that take over other banks can deduct from their taxes later on. The restriction had been on the books for more than two decades. It was intended to put an end to an increasingly commonplace tax shelter abuse. Although not directly comparable, I can’t help but think: If it’s good enough for financial institutions why not for the homeowner?

However, in terms of personal financial planning, I wouldn’t bank on the capital gains tax law changing when it comes to housing.

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