Recoup your real estate investment losses!!!!!!!!!!!!

This one has got to be the QUESTION OF THE YEAR… All year long we hear the same story. A client purchases a pre-construction property in Florida (or anywhere for that matter) with the enthusiastic intention to resell quickly and make a few bucks. This business proved to be very fruitful when the real estate market was booming. Not so much any longer. By the time many investors had to close on the property (since they couldn’t sell the contract), the market value of the properly was significantly less than the “original sales price”. Let’s put this in perspective. You purchase a preconstruction condo for $200,000 in 2007 with the intention of reselling for profit. You put 20% down, with the remaining $160,000 due at closing. In 2009, when the property is ready for closing, you realize that market value of the property is $100,000. Now what??? Basically, you are about to sign a mortgage on the property that exceeds the current value after you had already spent the 20% on the deposit. After some careful consideration, you decide to walk away from the unit and NOT go thru with the closing. You have sound reasons for doing so as you have determined that walking away from the deposit and losing $40,000 is more reasonable than entering into a transaction that seems to lack financial sense. We are not here to give guidance on real estate transactions or advice about purchasing and selling investment property. What happens with the $40,000 that you lost?


This question has been widely debated by accountants, attorneys, etc. Some feel that this transaction is deductible at the rate of $3,000/year pursuant to capital loss thresholds. It will take you 13 years to deduct the losses. Not a very comforting proposition…

You have already lost the $40,000. The best thing you can now do now is recoup a portion of it via the tax return. Our position on this is that you deduct the entire loss of $40,000 in the year you lost the deposit and offset the $40,000 loss against ordinary income. Now THAT doesn’t sound as bad. Under a 35% tax rate, you will be able to recoup $14,000.

Here’s the thought process…


If you take the position that this contact to buy real estate is to be treated as “real property”, then a loss that is generated from a sale of real property is an “ordinary loss”, (while the gain is capital in nature). An ordinary loss means you get to deduct the whole thing against your ordinary earned income, while a capital loss means that you are capped at deducting $3,000 per year. We will all take an ordinary loss instead of a capital loss any day. So, ordinary it is under this perspective…


If you take the position that this contract to buy real estate is not yet “real property” because no closing has taken place and no deed has been assigned… There is another IRS regulation that might work. Refer to http://www.irs.gov/publications/p4681/ch03.html. That regulation refers to abandonment of business property (and in this case, property doesn’t only mean real, tangible property). And guess what? Under that regulation, abandonment loss on business property is treated as “ordinary”, which means FULLY DEDUCTIBLE against ordinary income.

So we will take the chance advocating that abandoning a deposit on a property intended for resale is fully deductible against ordinary income. Now THAT is GREAT NEWS!!!

As always, contact us with any questions. Stay tuned!