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Columns: Tax Talk
George Saenz, CPA Expert: George Saenz, CPA
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Deducting investment property losses

Dear Tax Talk:
I bought a preconstruction house in a new development in 2005, hoping to gain some capital within the next few years. Eight months after I signed the contract, the house was selling for $30,000 more than what I paid. Now I am selling the house for personal reasons. They are still building, but the price of the house is $50,000 less than what I paid. When I do sell, I am going to lose about $40,000. Can I claim the loss in my taxes? Can I use a carry forward? I there anything I can do to recoup some of the money? Thanks for your attention to this matter.
-- Rudy

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Dear Rudy,
Your type of loss depends on the nature of the house in your hands. Most residential investment property is acquired for rental use. Losses on rental properties are deductible as ordinary losses or, if owned for more than one year, they are considered Section 1231 losses, which are ordinary losses as well.

Your holding period does not begin until you close on the preconstruction unit; it does not include the time that you held the contract as that is considered a different type of asset. If you sell it within the year, you may qualify for an ordinary loss instead of a capital loss. Ordinary loss treatment means you can write off the full loss in the year of sale, which will help you save more in taxes than capital loss treatment.

Capital losses are limited to capital gains and only $3,000 in excess of gains can be written off against other income. The remainder of the capital loss will be carried forward to future years when you have gains or utilized through the $3,000-a-year deduction.

Since you went into the contract with the intention of gaining "some capital within the next few years," you probably would have offered the house for rental. You may still offer the unit for rental if you can't sell it right off, especially if the developer is still building units. However, you may not want to rent the house, as it may be more difficult to find a buyer willing to accept the tenant.

If you can clearly demonstrate your intentions to rent the property, you should be able to receive ordinary loss treatment. Alternatively, you would receive capital loss treatment. Since the question hinges on your particular facts and circumstances, you should consult your tax adviser.

Bankrate.com's corrections policy-- Posted: Aug. 9, 2007
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