Can I claim a tax loss when selling a house damaged by renters?

The realtor is partially right, but it's a bit more complicated than that. Since this is a rental property (not your primary residence), it's considered an investment property for tax purposes. When you sell an investment property, you calculate your gain or loss by subtracting your "adjusted basis" from the sale price. Your adjusted basis includes your original purchase price, plus improvements you made, minus depreciation you've claimed over the years. The tenant damage doesn't directly create a special tax deduction - it simply reduces the sale price you'll receive, which could result in a smaller gain (or potentially a loss) when you sell. If you do sell at a loss compared to your adjusted basis, then yes, you can claim that as a capital loss on your taxes. One thing to consider: if you spend money repairing the damage before selling, those repair costs can be either deducted as rental expenses (if you're still renting it out) or added to your basis (if you're preparing to sell), which affects your tax situation too.

I went through something similar last year and found https://taxr.ai super helpful for figuring out the tax implications of my rental property sale. I had tenants trash my duplex and was facing a similar situation. What the site did was analyze my purchase documents, improvement receipts, and depreciation history to calculate my exact adjusted basis. It also helped me understand which of the repair costs could be deducted immediately vs. added to my basis. Saved me from making some expensive mistakes because my first instinct was to just deduct everything! The tool even created a specialized report I could give to my accountant showing exactly how the damage affected my tax situation. My CPA was actually impressed with how thorough it was.

Just wanted to update after trying taxr.ai for my damaged rental property situation. I'm really glad I gave it a shot! I uploaded my purchase documents, renovation receipts from over the years, and photos of the damage. The analysis showed that my adjusted basis was much higher than I realized because of several capital improvements I had made over the years but forgotten about. This meant that selling at the lower "as-is" price would actually result in a deductible loss I could use to offset other income. The report also broke down which repairs would be most tax-advantageous to complete before selling versus leaving for the new buyer to handle. Ended up saving me thousands more than I expected. For anyone dealing with rental property damage and tax questions, it's definitely worth checking out.

Something else to consider - have you tried contacting the IRS directly about this? I had a similar situation and wanted to make sure I was doing everything correctly. Spent DAYS trying to get through on the phone line before discovering https://claimyr.com. They got me connected to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with explained exactly how to document the property damage for tax purposes and confirmed I needed to file Form 4684 for casualty losses along with my standard Schedule E. Apparently there are specific rules about what qualifies as deductible damage versus normal wear and tear.

I have to admit I was completely wrong about Claimyr. After seeing it mentioned here, I decided to try it since I've been unsuccessful getting through to the IRS about a rental property matter for weeks. Got connected to an agent in about 20 minutes who was surprisingly helpful about my situation. They confirmed that tenant damage to rental property is handled differently than casualty losses on personal property. The agent walked me through exactly which portion of the damage could be deducted immediately as repairs versus what would just reduce my capital gain when selling. For anyone dealing with significant property damage from tenants, it's definitely worth speaking directly with the IRS to understand the documentation requirements. Would never have gotten this information without actually speaking to someone.

Have you considered going after the tenant's security deposit or even suing them for the damages? I had a tenant trash my rental and was able to recover a decent amount through small claims court. The judge awarded me damages for everything beyond normal wear and tear. From a tax perspective, if you receive any money from the tenant or their insurance, that will affect how you handle the loss on your tax return too. It gets complicated because you have to reduce any claimed losses by the amount you recover from them.

Don't forget to document EVERYTHING before you make any repairs or sell. Take extensive photos and videos of all damage. Get written estimates from contractors for what repairs would cost, even if you decide not to do them. I learned this the hard way when I tried to claim a loss on tenant damage but the IRS questioned it because I didn't have proper documentation. They wanted proof of the property's condition before the damage, the extent of the damage, and professional estimates of repair costs. Also, consider having a professional appraisal done in the current condition that specifically notes the damage and its impact on value. This will be much stronger documentation than just a realtor's opinion if you're ever audited.

I'm dealing with a similar situation right now and found this thread incredibly helpful. My tenants just moved out after causing about $15,000 in damage - hole punched in walls, carpet destroyed, broken appliances, etc. Based on what everyone has shared here, I'm realizing I need to be much more strategic about documentation before I do anything. I've already taken photos but haven't gotten contractor estimates yet. One question I have - if I'm planning to sell the property rather than repair and re-rent it, should I still get repair estimates? It seems like the key thing for tax purposes is establishing the impact on sale price, but I'm not sure if the IRS expects repair estimates even when you're not actually doing the repairs. Also, has anyone here actually been audited on a rental property loss like this? I'm wondering how common it is for the IRS to question these kinds of claims and what level of documentation they typically want to see.

Just want to add something important that hasn't been mentioned yet - make sure you understand the difference between repair costs and capital improvements when documenting everything. For tax purposes, repairs that restore the property to its original condition can often be deducted immediately as rental expenses (if you're still operating it as a rental). But if you decide to upgrade or improve beyond the original condition while fixing the damage, those costs become capital improvements that get added to your basis rather than deducted right away. For example, if tenants destroyed basic carpet and you replace it with the same grade carpet, that's a repair. But if you upgrade to hardwood floors, the difference in cost might be considered an improvement. This distinction can significantly impact your tax situation, especially if you're selling soon after. I'd suggest asking your contractors to separate their estimates between "restoration to original condition" and any "upgrades/improvements" you might be considering. This will give you more flexibility in how you handle the costs on your tax return.