No Longer a Residence

[Snaggletooth]

I may be dense, but nearly all the literature on selling your residence is dedicated to how to exclude gains. Historically, this is an overwhelming concern.

However, principal residence is a capital asset as far as losses are concerned. Simply can't take losses, and losses are overwhelming in the last five years.

How long must one leave their principal residence before it ceases to be their principal residence? Two years? Five years? There's lots of homes just sitting there because of the miserable economy. I'd like to know how long they have to leave it before they can take a loss.

[Dusty2004]

I may be dense, but nearly all the literature on selling your residence is dedicated to how to exclude gains. Historically, this is an overwhelming concern.

However, principal residence is a capital asset as far as losses are concerned. Simply can't take losses, and losses are overwhelming in the last five years.

How long must one leave their principal residence before it ceases to be their principal residence? Two years? Five years? There's lots of homes just sitting there because of the miserable economy. I'd like to know how long they have to leave it before they can take a loss.

I believe it stops being your personal residence when it becomes something else. Just letting it sit empty does not change the status from personal to investment.

Dusty

[Gretel]

I agree with Dusty. The other option would be to convert to rental. If that fails, it can sit empty again.

[MilTaxEA]

I believe it stops being your personal residence when it becomes something else. Just letting it sit empty does not change the status from personal to investment.

Dusty

I disagree. Usually tax law defines "principal residence" by using the same definition provided for Section 121 exclusion. In that case, Treasury Reg 1.121-1 provides the definition to follow.

Do not confuse the current principal residence with the requirements needed to exclude the gain of a property under 121. That requires that the property be your "principal residence" 2 out of the last 5 years. However, if you are no longer living in that house it has most likely become your second home, and the place you currently live in is your principal residence. You cannot have more than one principal residence at a time.

As soon as you cease to use it as your principal residence, the mortgage and other aspects of the home will change their character.

Edit: I should have read the original post a bit more carefully. I didn't realize you were interested in the definition in order to determine if the loss is deductible. Deducting the loss of a house is rare, unless it is investment/rental property. Even if it is rental property, as ttbtaxes mentions, your basis for computing a loss is the lesser of the FMV when converted to rental or your basis.

[ttbtaxes]

Don't forget that even if the home were to be converted to rental the basis is the LOWER of cost or FMV.

[Snaggletooth]

Reflections

A couple reflections:

1) Losses are an increasing factor in today's sick housing market. Nearly all the available literature is centered around excluding gains, but around here unless property has been owned 10 years or more, losses overwhelmingly will outnumber gains.
2) The reduction of basis to FMV (if we must do this) essentially nullifies any reportable loss.
3) It would appear that the 2 year rule for determining residence upon sale should apply equally for losses as for gains but I can't read any information pertaining to losses. It is quite common for govt to have different rules for losses as it does for gains.

[TAX4US]

Just a side note. In the Political arena this evening with Mr. Huckabee one of the candidates was proposing that due to the housing market downturn we should be able to write off losses. I wonder if this evens stands a chance?