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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My general contracting co bought a house in Jan 08 to renovate.

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My general contracting co bought a house in Jan 08 to renovate. It went on MLS in July 08. I dropped it $85k by May 09 but still had no offers. My other work also fell during this time and I couldn't keep paying the note and my own mortgage so I sold my house and am leasing the renovated house from my company.

We'd like to buy the house from my business, but now the business has over $600k in it, and by the end was only listed at $550k in MLS. Even an unlikely full price offer would be a loss. Last Dec, my CPA said I wouldn't be able to realize the loss until I sold the house to someone other than myself. I need to be able to realize this obvious loss, but can't wait years for me to move out of it. If the property was on MLS at $550k with absolutely no traffic, it seems to me if I buy it for that much I have a case that this is a legitimate loss and can realize it?

I'm going to discuss with my CPA again but I want a 2nd opinion and maybe buzzwords or tax code chapters to point to.
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
Hello zugg,

The information your CPA gave you is correct. You cannot deduct a loss on the sale of investment property when it is a related party transaction. This includes the following:

You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties.

Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.

A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. (See Constructive ownership of stock , later.)

A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable.

Please refer to the following IRS publication under the section covering Related Party Transactions.

http://www.irs.gov/publications/p17/ch14.html#en_US_publink100033302

I understand your thinking as to why this would apply even when the loss appears to be legitimate, but the IRS does not allow for any exceptions to this rule. My guess is that it would just be too difficult to try and monitor or audit each and every person who might try to claim this type of loss.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you zugg.





Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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