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geedubya55, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 358
Experience:  17 years experience in business and individual taxation specializing in small business and farming
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My wife and I have owned an investment condo in Florida for

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My wife and I have owned an investment condo in Florida for about 5 years and have always rented it out, except for the past 12 months during which time it has been For Sale. We are NOT in the "real estate business" and our W2 earnings are high enough to disqualify us from deducting the annual losses we incur (it's a real dog of an investment). Hence, we have a sizable loss carryforward plus we expect to lose an additional $100,000+ on the sale of the Condo.

My question is can we offset W2 income or self employment income with the capital loss upon the sale of the property? If not, what type of earnings can be offset, if any?

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Yes you can offset other income with the loss from the sale of the property because of the fact that it was used for rental. Under section 1231 of the Internal Revenue Code, gains or losses for sales of real property or depreciable property used in a business or rental activity, gains are treated as capital gains, but losses are treated as ordinary losses. Thus, the ordinary loss from the sale of the property can be used to offset ordinary income from other sources.


In addition, you mentioned that you may have some suspended losses to carry forward. I'm assuming this is because of the passive loss limitations. When an activity is disposed of, it releases all of the prior year suspended losses from that activity. So you will also be able to deduct those losses against ordinary income.

Customer: replied 5 years ago.
One more quick thing to make sure I don't mess this up. My renter left in July 2010. I'm hoping to conlude a sale of the property yet in 2011, so that I can deduct the loss against ordinary income for the tax year 2011. Does the fact that the property wasn't actually "rented" out in 2011 matter. Again, I have not ever lived there or used it as a vacation property. It's been empty while on the market since August 2010. Thx.
You will be fine as long as the property was only used as a rental property. Since there has been no personal use of the property, it is still considered rental property.
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