Selling Properties and Assets at a Loss

Look, no one likes selling investments for a loss, but that is just the kind of market we are currently living in.

Look, no one likes selling investments for a loss, but that is just the kind of market we are currently living in. Whether you’re a seasoned real estate investor or a small business owner, knowing how to navigate these scenarios can make a significant difference in your financial outcomes. And also, when I say property, you can substitute asset for the most part.

Property Losses and The Tax Implications

When you sell a property (or any kind of asset) at a loss, the tax code provides specific treatments that can be beneficial. For instance, if you purchased a property in 2022 in Savannah, Georgia, and are now selling it for less than the purchase price, this loss is classified as a 1231 tax loss. I’ve seen this play out for clients, and then they receive a nice tax surprise even though they lost on their asset or investment.

Section § 1231 Gains and Losses

Section § 1231 of the Internal Revenue Code deals with the sale or exchange of business assets or capital assets that are used in connection with a ToB or a transaction entered into for profit. Or property that is eligible for depreciation qualifies as ‘being used in a trade or business’ as well (Inventory does not qualify here).

Real estate dealers or flippers rarely get the opportunity to utilize § 1231 treatment. Basically, if the property is used in your business, or you’re working in it for a profit endeavor, then you can be subject to § 1231 rates.

Whether you have a gain or a loss, the treatment under § 1231 is rather favorable.

Section § 1231 Gains: If you sell business property at a gain, it is treated as a long-term capital gain, which is taxed at a maximum rate of 20%. However, depreciation recapture rules may apply, which could increase your tax liability. (And more times will convert the capital gain treatment to be ordinary treatment, especially if a cost segregation study had been performed.
Section § 1231 Losses: If you sell business property at a loss, the loss is treated as an ordinary loss. This is a significant advantage because ordinary losses can offset other types of income, such as W-2 income or income from other businesses.