Capital losses refer to the decrease in the value of a property or an investment below its purchase price. A capital loss occurs when a property is sold for less than the original purchase price, not including any improvements made or expenses incurred while owning the property. This loss is calculated by subtracting the sale price from the adjusted basis of the property, which is typically the purchase price plus any improvements made.
For instance, if you purchase an investment property for $500,000 and sell it later for $450,000, you’ve incurred a capital loss of $50,000.
It’s important to note that capital losses can have tax implications. In many jurisdictions, these losses can offset capital gains in the same year, effectively reducing the amount of capital gains tax an investor would have to pay. This practice is often referred to as “tax loss harvesting.”
Remember, investing in real estate can be complex and requires a comprehensive understanding of various factors, including market conditions, property valuation, tax regulations, and others. It’s always a good idea to seek advice from financial and real estate professionals when dealing with these kinds of investments.