Three guys formed an S-Corp in 2007 and bought a building lot for $175K, mostly financed with borrowed money. By the time of the 2008 scare, they still hadn't sold and were seriously under water. Over the years they decided to wait out the recovery and try to turn a profit or at least break even. During this entire time the corp never engaged in any other financial transactions or conducted any other business activities.
They kept putting money into the corp on a regular basis to cover the loan payments, property taxes, tax preparation fees, etc. By 2017 their accumulated capitalized interest and taxes, plus refi costs, have ballooned their cost basis in the lot to $340K. They finally decided to stop the bleeding and accepted an offer of $145K in 2017. So as I see it they have a $195K Long Term Capital loss on the 1120S, with $65K flowing through to each on their individual K-1.
One of them called to say his HRB tax preparer is insisting that this should be an ordinary loss rather than a LTCL. I'd like to agree with him since I'd like for them to deduct the entire loss, but I just don't see how it's anything other than a LTCL. Obviously the situation would be vastly different if this were a rental property, but it's just a vacant piece of land. Can anyone give me any reason to think differently?
They kept putting money into the corp on a regular basis to cover the loan payments, property taxes, tax preparation fees, etc. By 2017 their accumulated capitalized interest and taxes, plus refi costs, have ballooned their cost basis in the lot to $340K. They finally decided to stop the bleeding and accepted an offer of $145K in 2017. So as I see it they have a $195K Long Term Capital loss on the 1120S, with $65K flowing through to each on their individual K-1.
One of them called to say his HRB tax preparer is insisting that this should be an ordinary loss rather than a LTCL. I'd like to agree with him since I'd like for them to deduct the entire loss, but I just don't see how it's anything other than a LTCL. Obviously the situation would be vastly different if this were a rental property, but it's just a vacant piece of land. Can anyone give me any reason to think differently?
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