Rehabbing and Taxes

[Sean Hickey]

I have a tax question for the experienced...

I have a property that I purchased, rehabbed and could not sell for a long period of time. I lost a substantial amount of money on the deal (closed in 2009).

My business is set up as an LLC. Property was purchased in 2006. My accountant if advising me that the loss need to be capped at $3000 per year until full amount has been reached. I would rather take the full hit to offset my other income but he is uneasy about it. He advises me that the full amount can only be shown as a loss if I am a "Real Estate Professional" with 50% of my time in the business and 700 or more hours in the business for that year. RE is not my full time gig.

I feel I would have been taxed on the gain (if one had been made) as regular income (SE Tax plus regular income) but he says a gain on the property would have been taxed at Cap Gains rate.

It doesn't seem to make sense and I think I need to look for a new accountant.

What say you?

[Jon Holdman]

I always defer to my CPA for complex tax questions. If you don't trust your CPA, get a new CPA. I did.

There is a $3000 limit on capital losses. That is a real limit, but I've only deal with it on stocks. With stocks, if you have a $10,000 gain, you'll pay taxes on the entire gain in the year where you had the gain. If you have a $10,000 loss, you'll only be able to use $3,000 of the loss each year for three years, then $1,000 in the fourth year. Yes, that's a real limitation.

If you actually owned this property, the gains (had you had some) would have been subject to capital gains taxes. Could have been short term if you owned for less than a year and that would have been at your ordinary income rate. And, yes, you might have had to pay SET. But that doesn't mean you can take the entire loss at once. Unfortunately.

But, not a CPA. Took me a couple of tries to find one I really liked and trusted.