Question

If we sell a rental property that has had a big rental property value drop, can we deduct any of the loss?

Answer

Report the sale of the rental property on Form 4797. If you held the property longer than one year, you must report the sale of the land separately from the sale of the structure.

Report the sale of the land on Form 4797, Part I.
How you report the sale of the building depends on if it was a gain or a loss:

  • If there was a rental property value drop and you experienced a loss on the sale, report the sale on Form 4797, Part I.
  • If it’s a gain, report the sale on Form 4797, Part III.

The depreciation deductions will decrease your basis in the property. This is true even if you didn’t take them. If you have a net gain or a net loss from all your Section 1231 transactions, you can claim the rental property value loss on the sale of your rental property.

If you have a net loss on all your Section 1231 transactions, then you’ll have an ordinary loss. Section 1231 transactions involve the disposal of business property. The property usually must be held for more than one year.

You can include these types of property:

  • Sales or exchanges of real property
  • Sales or exchanges of depreciable personal property
  • Sales or exchanges of leaseholds
  • Sales or exchanges of cattle and horses
  • Sales or exchanges of other livestock (except poultry)
  • Sales or exchanges of unharvested crops sold with business-use land
  • Cutting of timber or disposal of timber, coal, or iron ore
  • Condemnations of business property
  • Casualties and thefts of business property

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