investing

Claim losses on investment property venture

George SaenzDear Tax Talk,
I had to back out of an investment property venture where I was going to purchase a condo for investment and rental. I lost my $19,000 deposit but had to settle with the builder's attorney, who I paid another $6,500 in legal fees. My attorney cost me another $4,500. I want to deduct the $6,500 and $4,500 under the miscellaneous deduction subject to the 2 percent limit on Schedule A. Can I do that? I believe the $19,000 can go on Schedule D.

Thank you,
-- David

Dear David,
My advice on the investment property venture differs slightly from your position. It is clear that if you entered into the preconstruction contract for investment purposes, the loss of the $19,000 deposit is deductible. Since it is not an asset used in a trade or business or subject to the deprecation allowance or inventory, the deposit would be considered a capital asset and the loss should be reported on Schedule D.

Generally, investment expenses are treated as miscellaneous itemized deductions on Schedule A (Form 1040). To be deductible, investment expenses must be ordinary and necessary expenses paid or incurred to 1) produce or collect income or 2) to manage property held for producing income.

The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Since the attorney fees were necessary to protect your interest in the property, which would have produced taxable rental income, they would be considered ordinary and necessary expenses.

The deduction for most income-producing expenses is subject to a 2 percent limit that also applies to certain other miscellaneous itemized deductions. However, in some cases, attorney or accounting fees are part of the basis of property.

If you incur attorney fees in connection with defending your right to an investment asset, then the fees paid are added to the basis of the asset and deducted accordingly. Hence, the attorney fees would be added to your deposit and written off when you deduct the loss on Schedule D.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

Start retirement savings at 24?

Dear Dr. Don, At age 24, I recently started a job working for a corporation. I'm interested in individual retirement accounts. I'd like to look at investing in stocks and bonds and learn more about choosing a 401(k) plan.... Read more

advertisement

Blog

Sheyna Steiner

Death of active funds greatly exaggerated

Actively managed funds have lost assets to index funds over the past five years. But the trend hasn't been consistent across asset classes.  ... Read more

Partner Center
advertisement

Connect with us