Tax implications of buying a 2nd home to sell at a loss - potential tax write-off strategy?

I understand your dilemma with the builder credit! Unfortunately, selling a second home at a loss isn't as helpful for taxes as you might hope. Unlike investment properties, losses on the sale of a personal residence (including second homes) are generally considered personal losses and aren't tax-deductible against ordinary income. If you were to convert the property to a rental before selling, you might have some options. When you convert a personal residence to a rental property, the property's basis for determining loss becomes the lower of your adjusted basis or the fair market value at the time of conversion. This could limit the deductible loss, but at least some portion might be deductible against your ordinary income (up to $25,000 if your AGI is under certain thresholds, which yours exceeds). As for timing the sale based on tax brackets - that would only matter if the loss were deductible, which as I mentioned, is problematic for personal residences. Have you considered using the credit toward a property that could function as an actual investment? Or perhaps negotiating with the builder for some kind of partial refund?

I was in a similar situation last year and found https://taxr.ai super helpful for figuring out the tax implications of different real estate scenarios. I was also looking at potentially taking a loss on a property and was confused about the tax treatment. Their systems analyzed my specific situation and helped me understand exactly what I could and couldn't deduct. They explained that personal residence losses aren't deductible, but walked me through how long I'd need to rent it out before it would qualify as an investment property loss. The advice was really tailored to my situation and they even showed me some creative strategies involving partial business use that I hadn't considered. Definitely worth checking out if you're trying to navigate complex tax situations like this.

Just wanted to update everyone after using https://taxr.ai to analyze this exact situation I was in. They were incredibly thorough in explaining all the tax implications of buying a second property and potentially selling at a loss. I learned that while personal residence losses aren't deductible, I had options if I genuinely converted it to a rental. The documentation they provided about how the IRS treats these conversions was eye-opening - they even showed me a detailed timeline of how long I'd need to hold the property and what kind of evidence would support treating it as a legitimate investment property. They also suggested some alternatives for using my builder credit that I hadn't considered, including options that might let me recover some value without the tax complications. Their analysis literally saved me from making a $100k+ mistake based on incorrect assumptions about tax deductions.

Have you tried calling the IRS directly to get clarification on how they'd categorize this potential loss? I was in tax trouble last year and spent WEEKS trying to get through to someone at the IRS. Finally found https://claimyr.com through a friend and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Since you're dealing with potentially large tax implications, it might be worth speaking directly with the IRS about your specific situation. The builder credit and quick conversion to rental property might be seen different ways, and getting official guidance could save you headaches down the road. Claimyr basically holds your place in the IRS phone queue and calls you when an agent is about to pick up.

I have to admit I was completely skeptical about Claimyr, but after waiting on hold with the IRS for over 3 hours one day, I gave it a shot. The service actually worked exactly as advertised - I got a call back when an agent was ready, which saved me from having to sit listening to that awful hold music. The IRS agent I spoke with gave me some really helpful guidance about my situation with rental property conversions. While they couldn't give me a binding ruling, they explained the factors they look at when determining if a property conversion is legitimate (like time rented, fair market rent, proper documentation, etc.). That conversation helped me understand what documentation I needed to keep and what timeline would be reasonable. Definitely worth not spending half my day on hold!

Have you considered a 1031 exchange instead? If you use that credit to buy a property and then exchange it for another investment property, you could defer any potential gains (though this wouldn't help with losses). It might be a way to at least preserve your capital until the market improves.

Has anyone mentioned the fact that this is probably a terrible investment regardless of tax implications? You're essentially saying "I'm going to spend $470k to avoid losing $130k" - that math doesn't work unless you really believe the property will hold most of its value. In this market, that's risky.

I agree with Tyler and Sara that the fundamental economics here don't make sense. You're basically throwing good money after bad. Even if you could somehow make this work as a rental property loss (which would require years of legitimate rental activity), you'd still be out significant cash. Consider this: at your income level, you're already maxing out most tax-advantaged strategies. The passive loss limitations mean you couldn't even use rental losses against your W-2 income immediately - they'd just carry forward until you sell the property or have passive income to offset. Have you exhausted all options with the builder? Some possibilities: - Negotiate a partial refund (even 50% back is better than losing it all) - Transfer the credit to someone else who actually wants to buy - Use it toward a smaller, less expensive property that might actually appreciate - See if they'll extend the deadline in exchange for a smaller forfeiture Walking away from $130k hurts, but it's better than turning it into a $200k+ loss. Sometimes the best tax strategy is simply not making bad investments in the first place.

As a newcomer to this community, I've been following this discussion with great interest since I'm facing a somewhat similar situation with a builder credit myself. What strikes me most is how everyone is focusing on the tax implications when the core issue seems to be risk management. Jackie, you mentioned you're both W2 employees making $520k combined - that suggests you have steady income and likely other investment options that don't involve the complexity and risk of this scenario. One thing I haven't seen mentioned is whether the builder has any flexibility on the timeline. Nine months feels arbitrary - is there any possibility they'd extend it for a fee that's less than the full $130k loss? Or could you use the credit toward a smaller property, maybe something in the $400k range that leaves you with a smaller net investment? I'm also wondering about the original reasons you backed out. You mentioned health concerns - are those fully resolved? Taking on a significant real estate investment (whether as a second home or rental) requires time, energy, and financial resources. If your health situation is still evolving, that might be another factor weighing against moving forward. Sometimes the best financial decision is accepting a sunk cost rather than compounding it. The tax strategies being discussed seem complex with limited upside given your income level.