Tax Treatment on Real Estate Loss: Sale of Lot

[Trooper]

Hi,

DW and I purchased an unimproved lot back in the boom days of real estate. Our thinking was either to use it as in investment or possibly build a retirement home on it one day.

Neither of those panned out, and we sold it last month at a significant loss.

What are we allowed to recover, if any, of the loss when filing our 2020 taxes?

Thanks.

 

[Souschef]

I am not a CPA, but unless there was a business or rental involved, you cannot deduct the loss.

 

[CardsFan]

I am not a CPA, but unless there was a business or rental involved, you cannot deduct the loss.

I am not sure that is true. I inherited some property, sold it at a loss from the day of death value, and took a deduction as a capital loss. Maybe I was wrong, and it never got caught? Turbotax seemed to think it was OK.

 

[COcheesehead]

I pretty sure personal RE property losses cannot be deducted.

 

[Trooper]

I am not a CPA, but unless there was a business or rental involved, you cannot deduct the loss.

No business, no rental.

 

[TrvlBug]

I am not sure that is true. I inherited some property, sold it at a loss from the day of death value, and took a deduction as a capital loss. Maybe I was wrong, and it never got caught? Turbotax seemed to think it was OK.

We also inherited some property and were expecting a loss which our CPA told us would be a capital loss deduction. I don't know if this applies to OP's situation.

 

[Peter]

I certainly had to pay tax on a capital gain resulting from an unimproved lot.

 

[cathy63]

Hi,

DW and I purchased an unimproved lot back in the boom days of real estate. Our thinking was either to use it as in investment or possibly build a retirement home on it one day.

Neither of those panned out, and we sold it last month at a significant loss.

What are we allowed to recover, if any, of the loss when filing our 2020 taxes?

Thanks.

You need to decide whether you bought it as an investment or for a retirement home, because the tax treatment for the two is different. If it was an investment on which you intended to make a profit, and just weren't able to, that is a capital loss for tax purposes. If you bought it to build a house and never got around to it and eventually changed your mind, that is a personal loss and has no effect on your taxes.

This might be helpful: https://ttlc.intuit.com/community/i...t-property-and-personal-use-property/00/25623

I am not sure that is true. I inherited some property, sold it at a loss from the day of death value, and took a deduction as a capital loss. Maybe I was wrong, and it never got caught? Turbotax seemed to think it was OK.

We also inherited some property and were expecting a loss which our CPA told us would be a capital loss deduction. I don't know if this applies to OP's situation.

Inherited property is treated like investment property (i.e. you can claim the loss) unless you live in/on it. If you lived there, then it's personal property and you can't deduct the loss.

 

[pb4uski]

Hi,

DW and I purchased an unimproved lot back in the boom days of real estate. Our thinking was either to use it as in investment or possibly build a retirement home on it one day.

Neither of those panned out, and we sold it last month at a significant loss.

What are we allowed to recover, if any, of the loss when filing our 2020 taxes?

Thanks.

Sounds like investment to me and that while there was a possibility that it might be converted to personal use that in fact it never was converted to personal use.

 

[Trooper]

Thanks everyone.

Sounds like investment to me and that while there was a possibility that it might be converted to personal use that in fact it never was converted to personal use.

That is really my situation.

You need to decide whether you bought it as an investment or for a retirement home, because the tax treatment for the two is different. If it was an investment on which you intended to make a profit, and just weren't able to, that is a capital loss for tax purposes. If you bought it to build a house and never got around to it and eventually changed your mind, that is a personal loss and has no effect on your taxes.

This might be helpful: https://ttlc.intuit.com/community/i...t-property-and-personal-use-property/00/25623

Thanks for the link. If the property is considered investment property, how is the capital loss treated? Can I fully net the capital loss against all of my capital gains (sales of mutual funds, mutual fund capital gain distributions), or am I limited to $3,000 capital loss per year?

 

[pb4uski]

I'm thinking the former.

 

[Souschef]

The $3000 limit applies after you deduct the loss from all your gains.
For example,
If your gains were $20,000 and your loss was $15,000 you can deduct all of it
However, if your gains were $15,000 and your loss was $20,000 you could only deduct $3000 that year. The remaining $2000 would be a capital loss carry forward you could deduct the following year.

 

[Trooper]

Thanks Souschef. My situation is the second one in your response. Using your numbers I would have a LTCG of $0 and a LTCL of $3,000 in 2020, and I would start off 2021 with a LTCL of $2,000 to be netted against 2021 LTCGs?

What is the treatment of the 2020 LTCL of $3,000? Does it reduce Qualified Dividends or Ordinary Income?

 

[Gill]

I am not sure that is true. I inherited some property, sold it at a loss from the day of death value, and took a deduction as a capital loss. Maybe I was wrong, and it never got caught? Turbotax seemed to think it was OK.

Inherited property is a different situation. You were entitled to the loss but you may have gotten away with something. Normally if sold within a reasonable time after date of death the sales price becomes the DOD value and there is therefore no gain or loss.
Gill

 

[TrvlBug]

Inherited property is a different situation. You were entitled to the loss but you may have gotten away with something. Normally if sold within a reasonable time after date of death the sales price becomes the DOD value and there is therefore no gain or loss.
Gill

Our CPA advised that any loss would be calculated on the purchase price and disposal costs. We assumed a loss would happen based on the horrendous condition of the property (located in a small midwestern town), but we were pleasantly surprised. We sold at auction w/in a couple of months of death and used the sale price as DOD value.

 

[RE2Boys]

Inherited property is a different situation. You were entitled to the loss but you may have gotten away with something. Normally if sold within a reasonable time after date of death the sales price becomes the DOD value and there is therefore no gain or loss.
Gill

Many times a loss can be taken when you factor in the expenses of selling the property!

 

[Gill]

Many times a loss can be taken when you factor in the expenses of selling the property!

Yes, of course.
Gill

 

[Gill]

Our CPA advised that any loss would be calculated on the purchase price and disposal costs. We assumed a loss would happen based on the horrendous condition of the property (located in a small midwestern town), but we were pleasantly surprised. We sold at auction w/in a couple of months of death and used the sale price as DOD value.

Your CPA told you the basis of inherited property would be the purchase price? Was it inherited from an irrevocable trust?
Gill

 

[TrvlBug]

Your CPA told you the basis of inherited property would be the purchase price? Was it inherited from an irrevocable trust?
Gill

That's my recollection, however, I could be wrong. No trust involved.

 

[Gill]

That's my recollection, however, I could be wrong. No trust involved.

Not all CPA’s are conversant with estate matters. If it was inherited from a decedent the basis is date of death value, the best indication of which is sale price within a reasonable time after death.
Gill

 

[kaneohe]

The $3000 limit applies after you deduct the loss from all your gains.
For example,
If your gains were $20,000 and your loss was $15,000 you can deduct all of it
However, if your gains were $15,000 and your loss was $20,000 you could only deduct $3000 that year. The remaining $2000 would be a capital loss carry forward you could deduct the following year.

I find the wording above a bit confusing:

I would prefer Sch D type wording:
1)if your gains are 20K and your loss is 15K your net result is a gain of 5K.
You do not deduct the 15K loss but have made full use of it.
2)if your gains are 15K and your loss was 20K, your net result is a loss of 5K.
Again you do not deduct the 15K loss that was netted against the 15K gain but have made full use of it. The additional 5K of loss that was not used against gains is subject to the 3K/yr limit so that amount (3K) is deducted from income this yr and the remaining 2K loss is carried over to next yr.

 

[Backpacker]

As a footnote to this, in Michigan if the tax assessed value has gone down from amount at original purchase you can avoid the transfer tax. Can't speak to other states, but a weird little loophole in Michigan.