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Some taxpayers in this situation take the position this is "investment property" and thus a loss on sale would be considered a capital loss from the sale of investment property. Treating it as investment property would allow a deduction
of the loss to offset any capital gains for the year and then up to $3,000 of other income. Any unused portion could then be carried over to future years. But, this would be a very aggressive approach given the case of Moore v. Comm., T.C. Memo. 2007-134 (2007). In that case, the Tax
Court ruled that holding property solely for appreciation wasn't sufficient to support a classification as investment property. So, if the IRS were to challenge your position on the loss, you could expect them to contest your classification of this as investment property.
This is the part of my job I don't like...when the law
is not in favor of my customer. I wish I could tell you that you could simply deduct the loss, but, I can only provide you information based on the law so that you can act on the best available information to you. ………..I wish I had better news, but can only hope you recognize and understand my predicament and don't shoot the messenger. I'm sorry!
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