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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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Hello. My wife and I sold a rental home that had about $73K

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Hello. My wife and I sold a rental home that had about $73K in unallowed losses over a 2.5 year period. We sold the home this year and are trying to anticipate the tax benefit. Our gross income this year will be about $180K. We also sold the home at a loss (purchased for $489K in '05 and sold for $370K in '13). Thanks.

USTaxAdvising :

Hello

USTaxAdvising :

I can assist you with your tax question, I am reading through your facts

Customer:

Okay, please keep me posted.

USTaxAdvising :

So the 73K in unallowed losses will be released and you will get an ordinary tax deduction for it. (i.e. it should offset your other ordinary income like salaries or self employment income)

Customer:

Do I deduct it all in one year or over time? Does the capital loss work in the same way?

USTaxAdvising :

You would get to deduct the 73K all this year, not over a period of time.

USTaxAdvising :

The "capital loss" on the property would not really be a capital loss. Losses on the sale of rental property generally qualify for IRC 1231 treatment which basically converts the "capital loss" to an ordinary loss.

Customer:

Okay, thanks. So do I get a deduction for that ordinary loss?

USTaxAdvising :

Based on your facts I see an additional ordinary deduction of (489-370) 119K

USTaxAdvising :

Basically yes. I'll bring up some support for you. One moment.

USTaxAdvising :

Here is a good article from wikipedia that explains it well - http://en.wikipedia.org/wiki/1231_property

Customer:

Great, thank you.

USTaxAdvising :

See also IRS Publication 544 here - http://www.irs.gov/publications/p544/ch03.html#en_US_publink100072547

USTaxAdvising :

Let me know if you have any further questions. I'll stay online for another 5-10 minutes. :)

Customer:

Okay, thanks. At a quick glance, it's still unclear what I do with the $119K loss. Does it further reduce my taxable income, after I take the $73K off from the unallowed losses? If the total exceeds our income, how does that work?

USTaxAdvising :

Yes you would get to take the 119K loss as well in the current year. I calculate total ordinary deductions at approximately 192K

USTaxAdvising :

Therefore it looks like you may have a net operting loss "NOL" for the current year (approximately 12k)

USTaxAdvising :

The NOL assumes you have no other income other than this loss of 192K and other ordinary income of 180K.

Customer:

How does that impact our taxes? Does that loss carry forward to next year? if we have no income for this year, do we get all of the income tax we paid this year refunded?

USTaxAdvising :

Basically you would have no tax due in the current year and carryforward the remaining 12K to 2014 and future years.

USTaxAdvising :

here is a summary from IRS Publication 544:





When To Use an NOL






Generally, if you have an NOL for a tax year ending in 2012, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL for up to 20 years after the NOL year (the carryforward period). You can, however, choose not to carry back an NOL and only carry it forward. See Waiving the Carryback Period , later. You cannot deduct any part of the NOL remaining after the 20-year carryforward period.

USTaxAdvising :

Sorry - correction IRS Publication 536 - http://www.irs.gov/publications/p536/ar02.html#en_US_2012_publink1000177355

Customer:

Okay, thanks. I appreciate the help.

USTaxAdvising :

it says 2012 here but it applies to 2013 as well, it's just that the IRS has not yet finalized the publication for 2013

USTaxAdvising :

Let me know if you have any further questions. :)

Customer:

I think that's it for now. Thank you.

USTaxAdvising :

Excellent. If something comes up you can always come back to this question and ask a follow up. Save the link and you can open the question again.

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