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Dear Tax Talk,
We purchased a residential block of land as an investment about three years ago. The investment did not do so well. After paying interest, taxes, etc., we will be selling the land at a loss — considerably less than the purchase price.
My question is: Can we declare this investment loss on our next tax return? We are both full-time workers.
Generally, a loss incurred on a transaction entered into for profit is tax-deductible. I’m not sure what exactly you bought, but the Internal Revenue Service would ask you to show your investment intention. The property is residential, so the IRS may argue that it was your intention to live there and build a home. You could disprove this if, for example, your home was purchased shortly before the block purchase, the land is truly a city block where one house wouldn’t make sense, you had developed plans to make the land profitable, etc.
The interest and taxes should have been deducted annually, so they would not be part of your cost unless you made an affirmative election with your tax return to capitalize these costs. The difference between cost and sales price plus expenses of sale would be treated as a capital loss reported on Schedule D. Unfortunately, if you do not have other capital gains, your maximum annual deduction for capital losses against other income is $3,000.
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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.