How are losses on the sale of a primary personal residence treated for tax purposes?

Losses on the sale of a primary personal residence are not deductible for tax purposes. This treatment stems from the tax code which distinguishes between personal and investment property. When a taxpayer sells their personal residence at a loss, that loss cannot be used to offset other income or gains. The reasoning behind this rule is that personal residences are considered a personal asset rather than an investment. Unlike investment properties, which can generate income and have losses that may offset capital gains, personal residences do not afford the taxpayer the same tax benefits upon sale.

In contrast, if a taxpayer sells an investment property at a loss, that loss could be deductible as a capital loss, which can offset capital gains or, in certain situations, be used to reduce ordinary income. This approach helps in promoting homeownership while limiting the tax advantages associated with personal residences. Therefore, the correct treatment is that losses on the sale of a primary personal residence are not deductible.