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If you’re going to sell your home, you naturally want to earn a profit, but in some circumstances that simply isn’t possible. You might think that it’s better to hold onto your house and wait for conditions to improve, but sometimes selling a house at a loss makes more sense in the grand scheme of things.

Reasons to Sell a House at a Loss and Potential Tax Implications
When the housing market is falling, no one knows for sure when it will hit bottom. If your house has declined in value, there’s a chance that it may fall even further and possibly result in a catastrophic loss if you wait to sell. If you sell your primary residence at a loss, you won’t be able to deduct that loss on your tax return. If the sale price is higher than the purchase price, the IRS will consider that a gain, and you’ll need to pay taxes on it, even if you have outstanding mortgage balances that are higher than the sale price.

If you’ve missed several mortgage payments, selling your home at a loss can allow you to walk away and avoid the overwhelming stress of going through foreclosure. It can also help you avoid the blemish of a foreclosure on your credit report and long-term damage to your creditworthiness. If the lender forgives some or all of your debt, you may have to pay taxes on it.

In a rough market, some homeowners find themselves underwater, owing more than their home is worth. If you’re in that situation, your lender may agree to a short sale. That means you can sell the house and the bank will agree to accept less than what you owe so you can avoid foreclosure. As is the case with a foreclosure, you might have to pay taxes on any debt forgiven in a short sale.

If you own a rental property that’s losing money, selling it at a loss might be beneficial come tax time. You’ll be able to deduct that loss when you file your income tax return, which may significantly lower your tax burden for the year.

Explore Your Options
Selling a house at a loss is something no one wants to do, but sometimes it’s the best way to avoid even worse financial problems. If you’re struggling to pay your mortgage or the real estate market is suffering, you might be better off cutting your losses and moving on. Before you do, talk to real estate and tax professionals and be sure you understand all your options and the possible ramifications of each.