If a buyer has a $169,000 second home and sells it for $154,000, what is the tax implication of this sale?

The correct response indicates that the IRS will not allow any loss deductions on a personal residence. This is because the tax code treats losses from the sale of personal-use property, such as a second home or personal residence, differently than losses from business or investment properties.

When a second home is sold at a loss, as in this scenario, the IRS does not permit the taxpayer to deduct the loss. Personal residences do not qualify for capital loss deductions, meaning that the taxpayer cannot reduce their taxable income by reporting a loss from the sale of the home. This policy is designed to limit the deductions that taxpayers can take on personal property, as personal residences are subject to different tax rules compared to investment properties or business assets.

Understanding this principle is crucial for buyers and sellers of real estate, particularly when it comes to second homes, which are often viewed as personal use properties rather than as investments.