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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: of 121217  
Subject: Re: Profit or Loss Date: 3/17/2008 12:37 PM
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So disregarding the mess of cost basis.....Would this be a profit or a loss?

You can't disregard the mess of cost basis when figuring profit or loss on a capital transaction such as this.

The basic formula is to take the sale price, subtract off selling expenses and subtract off the cost basis. The result is your gain or loss.

In your case, the broker fees are clearly a selling expense. Its the back taxes that are an issue in my mind.

Typically property taxes on an investment property such as this would be deducted each year as itemized deductions. They would not affect the calculation of gain or loss for tax purposes.

However, when considering the acquisition of a property, if you pay the previous owner's back property taxes as a part of buying the property, those taxes become part of your basis, not a current deduction.

Here, the property was legally yours under the terms of the trust. It sounds like it became your property back in 2002. But you didn't know about it until just recently. You didn't state it directly, but I'm guessing that to get clear title to the property so you could sell it, you had to pay the back taxes on the property. To the extent those taxes were due and payable before 2002, I would add them into your basis. It is the taxes between 2002 and the time you discovered your ownership that are the question in my mind.

I could see a line of reasoning that would add those taxes to your basis as well. You can only pay taxes on property you know (or should know) that you own. Unless you had some reason to know the terms of the trust AND the property held in trust, you would have no idea that you were the beneficial owner of the property. Once you became aware of your beneficial ownership, you took the steps necessary to perfect that ownership, including the payment of old outstanding property taxes. So paying those back taxes was a necessary step to acquiring the property.

However, you could also reason that the taxes should be a current itemized deduction. You owned the property and were responsible for paying the taxes. But you could not deduct any penalties and interest on those taxes.

I guess you'd want to see which line of reasoning works in your favor. Having a larger gain (or a smaller loss) plus a smaller itemized deduction for property taxes, or a smaller gain (or a larger loss) and no itemized deduction.

--Peter
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