As you mention an investment property....
what kind of property is that?
Is that a land you purchase for future appreciation?
If that a rental property or any other depreciable income producing property?
Or that is your personal property that you purchased for future appreciation?
Your accountant is correct - due to passive activity loss limitation and based on your AGI - you are not allowed to deduct rental losses, but all losses are deductible at the time you sell the property.
If you sell rental property and report the sale transaction on the form 4797 - you will have long or short term capital gain or loss.
- and you can elect to exclude the cancellation of such debt from taxable income - but should also reduce the basis of your depreciable real property by the amount excluded.
Reporting procedure is described in the IRS publication 334 - http://www.irs.gov/pub/irs-pdf/p334.pdf - see page 23.
Please be aware that filing the form 982 to make an election is required and that form should be attached to your federal tax return.
As long as your basis will be reduced for rental property - that will reduce your capital gain/loss. You still are limited in deducting capital loss - you may offset any other capital gain but may deduct only up to $3000 of net capital loss in the current year with the rest to be carried over.
If you provide the information above to your tax preparer - I think he/she would know what to do.
Let me know if you need any help.
Tax Preparer
Taxes, Immigration, Labor Relations
That is correct, however for business or income producing property - the canceled debt is a qualified real property business debt - you may make election to reduce your basis by the amount of forgiven debt.
Reporting procedure is clearly described in the IRS publication 334 - http://www.irs.gov/pub/irs-pdf/p334.pdf - see page 23.