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Dear Tax Talk,
For how many tax years can you claim a loss on land purchased as an investment? Can you only claim, up to $3,000, a loss in the one tax year in which you incurred the loss — that is, the year you sold the investment land? Or can you claim, and carry over, a huge investment loss — in our case, over $100,000 — over several tax years? Please advise. Thank you so much.
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The amount of capital loss you can claim each tax year is limited to $3,000 above and beyond any capital gains you have. You can carry forward the losses until they are completely used up in future years.
This sounds very simple; however, it’s complicated due to the forms requiring you to “net” your gains and losses before calculating the tax rates.
There is a lot of confusion in this area of the tax law. So let’s begin by defining a “capital asset.”
What is a capital asset?
Just about everything you own for personal or investment purposes is a capital asset. Homes, investment properties, stocks and bonds held as investments and even personal-use assets, such as household furniture, are considered capital assets.
A capital asset is considered “long term” for purposes of calculating your taxable gain or loss if you own the asset for more than one year before you sell it. If you own it for one year or less, it is considered to be a “short-term” gain or loss. Keep in mind that losses from the sale of personal-use capital assets are not tax-deductible.
The difference with long-term and short-term gains and losses is how each ends up being taxed on your income tax return. Capital gains rates apply to long-term capital assets, while ordinary income tax rates apply to short-term assets. So make sure you have each asset properly classified when you are completing the forms.
Most sales of capital assets are reported on IRS Form 8949, Sales and Other Dispositions of Capital Assets, which then are summarized on Form 1040 Schedule D, Capital Gains and Losses. The IRS has Worksheet 4-1 Capital Loss Carryover in IRS Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), to help you calculate your carryover amount to future years.
Thanks for the great question and all the best to you.
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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.