nondeductible losses

How Will the Pandemic Affect Home Sale Prices and Related IRS Policies?


In the final installment of this three-part series, Julian Block discusses how the COVID-19 crisis could influence trends in sales prices for homes and then discusses how the IRS treats losses on home sales.

Jun 11th 2020
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I devoted two previous columns to strategies that help homeowners. This one starts with how the COVID-19 crisis could influence trends in sales prices for homes and then discusses how the IRS treats losses on home sales.

We’re all preoccupied with the coronavirus pandemic. Before it began, lots of homeowners expected to realize prodigious profits on sales of their dwellings. But are those profits endangered because a continuing crisis adversely affects sales prices?

I recently asked real estate brokers in my neighborhood for their take on what could happen. They mostly agree that prices aren’t going to decline in areas that, as of now, experience only low numbers of confirmed cases; they’re going to decline in areas with lots of them, particularly those that become covid-19 hot spots.

I’ve received pandemic-related queries from wannabe sellers whose dwellings are in hot spots. Their brokers, they concede, correctly caution them not to fixate on diminished profits, or, even worse, losses.

What, wannabes want to know, should they do instead? The advice dispensed by some of their financial planners: They just might have to resign themselves to corona-caused losses on eventual sales.

Understandably, sellers become displeased when hired-hands admonish them to stay serene as anticipated profits yield to actual losses. Their displeasure prompts some of them to seek advice from tax professionals.

They ask questions like these: What kinds of consolation will our lawmakers bestow on sellers who suffer losses on home sales? Will they be able to claim deductions? If so, how sizable? What requirements will they have to satisfy?

Why do some sellers believe they ought to seek my advice? Because they mistakenly, though not unreasonably, believe that my crystal ball will reveal provisions buried in the Internal Revenue Code that allow them to offset their losses against income received by them from other sources.

When I ask them to cite some sources, they typically mention, among other things, their salaries, pensions, dividends, and their withdrawals from IRAs, 401(k)s and other tax-deferred retirement plans.

They invoke other, seemingly plausible, reasons for me to rummage through the tax code. One is that most of them also are investors who frequently sell stocks, bonds, and other holdings, and, even those born yesterday, know that long-standing rules allow investors to offset their losses from sales of stock against their gains from such sales.

What if there are no gains? Then, nyet problemy, it’s okay for them to carry forward unused losses to future years. For how those straightforward rules work, see Acccountingweb’s “How to Help Your Clients Offset Capital Losses."

Another reason: Many of them also own businesses that experience losses, some corona-caused. They know that the rules for what the IRS dubs net operating losses authorize breaks for owners. They’re able to carry their losses back to previous years as offsets to income and to carry them forward to future years as offsets. For how those convoluted rules work, see Accountingweb’s “Cares Act Carves Out New Tax Breaks for NOLs,” Apr. 20, 2020.

My standard answers to their questions: It will be injurious to their health if they inhale and remain that way until Congress fixes things. Our tax laws have always prohibited write-offs for losses on home sales—and no, there are no extenuating circumstances.

An example: An IRS ruling barred a deduction for a loss when a family, with a child in a wheelchair, made a doctor-recommended move from a two-story to a one-story house.

Does an intransigent IRS care that a homeowner is out of pocket because a job relocation triggered by a layoff, illness, death, divorce, or some other unforeseeable event compelled a sudden sale before a residence appreciated sufficiently to offset brokerage commissions, legal fees and other expenses involved in buying and selling? Nope.

Consistent with that unyielding approach, losses aren’t deductible when employees move to take new jobs or they’re transferred to new locations. Well, what if their employers reimburse them for the losses?

Makes no difference, says the IRS. It refuses to allow employees to offset otherwise nondeductible losses against the reimbursements. The snag is that they’re separate transactions; the losses stay nondeductible; the employees are dinged for taxes on the reimbursements.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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