Selling for a Loss

As noted earlier, if you have the misfortune to lose money when you sell a home, don't expect any help from Uncle Sam. Losses on home sales are not deductible. But you may have heard that

You can even deduct the cost of moving your pets from the old home to the new one.

there's a way to write off such losses. Often promoted as a great tax scheme, promoters say home-sale losses can be deducted if, prior to the sale, you convert your house to a rental property.

That's true, but there's a catch that makes the tactic worthless. The basis for figuring your loss begins as the lower of the adjusted basis or fair market value at the time of the conversion. (The basis is increased for any improvements after the conversion and reduced for any depreciation claimed.) In other words, any loss in fair market value that occurs while you're living in the house still can't be deducted.

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