Lurker, I have a tax question

[ziggy]

Lurker,
I have a question.  Correct anything and everything I have wrong here.

Assume you buy a home for $250,000, and put $25,000 down, and then make payments so that you get to a point where you owe $200,000 on the mortgage, with $50,000 in equity.  You sell the home, and only get $150,000.  Now you have a $100,000 capital loss.

You can apply that capital loss against any other capital gains you may have, but you cannot apply the capital losses against prior years capital gains.  If you have no capital gains, then you can apply $3,000 a year, until you burn up the $100,000.  Is that all correct, or do you handle capital losses on a primary residence differently than other capital losses?

[Lurker]

The general rule is that capital losses are allowed only in trade/business or investments.  A residence is considered personal property and the loss is not deductible.  A residence that is converted into a rental property and then sold later can generate a taxable loss.  But there are certain requirements that must be met at the time the property is converted from personal usage to investment use.

A caveat:  there still may be more tax changes that will allow losses to homeowners who are foreclosed upon.  Generally a foreclosure is treated as a sale for the remaining balance of the mortgage.  In your example then there would only be a $50,000 loss but it is still non-deductible.

Another potential trap when property is foreclosed...the lender may still have the right to come after the original owner if the foreclosure sale doesn't produce enough proceeds to cover the outstanding debt.  If they don't then any short fall is "forgiven" debt.  Using your example if the lender gets only $150,000 for their $200,000 mortgage then the $50,000 forgiven debt is considered income by the IRS.  I know there has been talk in DC about helping taxpayers in this area also.

Otherwise your understanding of capital losses is correct.