Determining Gain or Loss

• To determine whether a property sale resulted in a loss or gain, you must compare your adjusted basis to the amount realized on the sale. Your adjusted basis is the original cost of the property plus the cost of improvements or additions minus deductions for casualty loss or depreciation. The amount realized on the sale is the money you receive plus the value of property or services you receive and the value of liabilities you transferred to the buyer. If your amount realized is greater than your adjusted basis, you have a capital gain. However, if your amount realized is less than your adjusted basis, you have a capital loss.
  
  

Deductible Losses

• You can't deduct losses you incur from the sale of personal-use property. However, if you incur a loss from the sale of business property, it is typically tax deductible. You can deduct a portion of the losses you incur from the sale of property that you use for both personal and business purposes. You can also deduct losses from property that was initially for personal use if you began using it for business purposes before you sold it.
  
  

Example

• If you bought a piece of investment property for $200,000, added $4,000 worth of improvements and deducted $2,000 for casualty losses while you owned it, then your adjusted basis is $202,000 (200,000 + 4,000 - 2,000). If you sold the property for $150,000 and the borrower assumed your property taxes of $2,000 and your mortgage of $20,000, then your amount realized is $172,000 (150,000 + 2,000 + 20,000). Since your adjusted basis is more than your amount realized, you have a deductible capital loss of $30,000 (202,000 - 172,000).
  
  

Properties With Dual Purposes

• If you are calculating capital gain or loss for a property that you use for both personal and business activities, you must calculate a gain or loss for the sale of the business portion and a separate gain or loss for the sale of the personal portion. Losses for the sale of the business portion are deductible, but losses for the sale of the personal portion are nondeductible.