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 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
 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.
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