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Author: MostCurious1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Investment TownHouse Tax Loss? Date: 9/22/2005 9:08 PM
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In Arpil or May our daughter found a TownHouse she liked very much and put in an above asking price offer. Seller accepted offer, but a few days later Realtor called and said somebody else made a better offer on TownHouse #1. Daughter declined to outbid the other buyer and looked for another Townhouse. She found one, made an offer, and this one was accepted, this now being Townhouse #2. Things were going along quite well, mortgage had been preapproved etc. A little while later the deal of the outbidding buyer for Townhouse #1 fell thru because of home inspection/seller's concession issues.
Daughter rebids ( $6,000.00 less than originally) on Townhouse #1. Bid is accepted again, and Townhouse #1 goes to contract.
It now comes about that she now owns BOTH Townhouses, lives in #1 and cannot afford the extra $2,500 - 3,000 a month principal, interest, PMI, taxes, insurance etc that #2 is costing her. When she closed on #2 she put it on the market again on the same day. But no nibbles. Here is what I think will happen: Even though I do not hope this for her, I think she will eventually sell # 2 at a loss. I do not know the exact numbers but it is something like this: Purchase price 330,000, selling price 300,000. Down payment 33,000, brokers commission 6%, carrying cost for 6 months 15,000, closing costs 5,000.
Assuming these numbers are in the right ballpark, it looks like this little adventure costs her about $ 60,000 or so, hopefully a lot less! Can she offset her regular earned income (around $ 80,000 p. a.) in the year of the sale of #2? @ 3,000 per year? or all at once? No other capital gains or losses expected in 2005 or 2006.
Thanks,
MC1
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80824 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/22/2005 11:54 PM
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Assuming these numbers are in the right ballpark, it looks like this little adventure costs her about $ 60,000 or so, hopefully a lot less! Can she offset her regular earned income (around $ 80,000 p. a.) in the year of the sale of #2?

No.

@ 3,000 per year?

No.

or all at once?

No.

Your (unquoted) facts say this was personal use property, and a loss on the sale of personal use property isn't deductible. She can deduct the mortgage interest and real estate taxes paid, but that's it.

Phil



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Author: MostCurious1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80827 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/23/2005 5:03 PM
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Hi, Phil
I would think that the position would be:
This was not her first choice property but once she was locked into the purchase contract for #2 and her preferred #1 property became available again she bid on #1 again and purchased #1.
(Closing for #2 was about 10 days before #1)
She also had a commitment to purchase #2, but she never intended to move into #2, once she had #1 locked in again. Evidence of this is that she put #2 on the market again the same day that she closed on #2 and never moved in.
She also inquired about renting it out, but the potential rent would not nearly cover the monthly cost and renting it out might also be a burden in the event of a quick sale.
So, would it not follow, that this was a BAD INVESTMENT and the loss is deductible against any future capital gains or @ $3,000 p.a.?
Thank you for your prompt response and your down in the trenches, experienced reasoning.
Harald


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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80828 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/23/2005 5:53 PM
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So, would it not follow, that this was a BAD INVESTMENT and the loss is deductible against any future capital gains or @ $3,000 p.a.?

Except that it was never intended as an investment. It was intended to be her residence. When a "better" choice came along, she switched horses mid-stream. That doesn't change the fact that the place she's selling was acquired as a personal residence.

It was a BAD PURCHASE FOR PERSONAL USE, to use your phraseology.

She can deduct the mortgage interest as a second residence (unless she is up against the $1MM of residence debt limitation with the two mortgages combined). And she can deduct the property taxes she pays on that place until it sells.

--Peter

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Author: DWSZ Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80829 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/24/2005 12:23 PM
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MostCurious1,

Although I am not a tax expert by any means, I think the situation you describe might quite possibly be viewed by the IRS as "flipping a property." IOW, a property is purchased and then sold, hopefully at a profit; you make money and pay taxes. If the property is sold at a loss, too bad.

As I said earlier, I'm no tax expert but even I don't think an IRS rookie would let this pass the "smell test."

Best regards,
Duane

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80830 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/24/2005 3:45 PM
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I would think that the position would be:
This was not her first choice property but once she was locked into the purchase contract for #2 and her preferred #1 property became available again she bid on #1 again and purchased #1.
(Closing for #2 was about 10 days before #1)
She also had a commitment to purchase #2, but she never intended to move into #2, once she had #1 locked in again. Evidence of this is that she put #2 on the market again the same day that she closed on #2 and never moved in.
She also inquired about renting it out, but the potential rent would not nearly cover the monthly cost and renting it out might also be a burden in the event of a quick sale.
So, would it not follow, that this was a BAD INVESTMENT and the loss is deductible against any future capital gains or @ $3,000 p.a.?


Investment losses on intangible assets (stocks, bonds, etc.) and certain well defined classes of tangible assets (collectibles, precious metals, etc.) are deductible. Otherwise, losses on personal use property are nondeductible.

Had she actually rented the property (perhaps even if she made a bona fide attempt to rent it), she might have been able to deduct the loss. But, in the absence of clear evidence that this property was used for business or rental purposes, there's no deduction.

Ira


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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80831 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/24/2005 3:56 PM
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irasmilo writes (in part):

Had she actually rented the property (perhaps even if she made a bona fide attempt to rent it), she might have been able to deduct the loss. But, in the absence of clear evidence that this property was used for business or rental purposes, there's no deduction.

I reply:

Is it too late? According to the original poster, the property is on the market but "no nibbles." The original poster predicts a hefty loss when it is eventually sold, but for now that's merely a prediction. So if his daughter takes the property off the market and makes a bona fide attempt to rent it, does the analysis change? Because the difference between being able to claim a $60,000 loss and not being able to claim it may be worth some economic risk. --Bob

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80832 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/24/2005 4:02 PM
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Because the difference between being able to claim a $60,000 loss and not being able to claim it may be worth some economic risk.

Staying away from the point of your post, because it gets beyond my comfort level in such things as intent, substance, etc., I'll just point out that there's no $60,000 nondeductible loss in any case, IIRC. That number wasn't a tax number and included such things as mortgage payments, the bulk of which will be deductible as interest regardless.

Phil

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80833 of 121095
Subject: Re: Investment TownHouse Tax Loss? Date: 9/24/2005 6:40 PM
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Because the difference between being able to claim a $60,000 loss and not being able to claim it may be worth some economic risk.

Staying away from the point of your post, because it gets beyond my comfort level in such things as intent, substance, etc., I'll just point out that there's no $60,000 nondeductible loss in any case, IIRC. That number wasn't a tax number and included such things as mortgage payments, the bulk of which will be deductible as interest regardless.


I agree with Phil. The issues of intent and substance are beyond my comfort level as well. I only raised them because I'm sure there are aggressive tax advisors who would take the position that you could make these losses deductible. I have no idea whether they could prevail.

Ira


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