How does a taxpayer report a loss on sale of a rental property on their tax return?
The loss on the sale of rental property is reported on Form 4797, Sale of Business Property and this loss is treated as an ordinary loss.
A loss from the sale of a rental property is tax deductible as an ordinary loss. Ordinary losses are deductible in full against your ordinary income such as your wages, self-employment income and other portfolio income earned by a taxpayer.
It is worth noting that a gain from the sale of a rental is taxed as capital gains, whereas a loss on the sale is treated as an ordinary loss. This is one IRS tax code that has actually benefited taxpayers!