Tax treatment on Sale of Investment Property

[MichaelDi09]

I have a client who own rental properties and sold a property , that had been sold in 2016, damaged by fire, and repossessed in 2017.

There was no rental of this property, as it was in repair up until sale in 2019. There is a $400K loss that I'm trying to determine proper treatment.

Is it a capital loss or sec 1231 ordinary loss? Can someone shed some light on how to handle? Thanks.

[ATSMAN]

Are you saying that the fire damaged property was never rented? Was it ever listed on a Sch E?

I am abit confused when you say "that had been sold in 2016" and then you say "until sale in 2019". When was the property in question sold? Do you mean repossessed in 2017 that is an involuntary sale?

[MichaelDi09]

Are you saying that the fire damaged property was never rented? Was it ever listed on a Sch E?

I am abit confused when you say "that had been sold in 2016" and then you say "until sale in 2019". When was the property in question sold? Do you mean repossessed in 2017 that is an involuntary sale?

The building was repossessed after fire and due to fact that buyer from original sale in 2016 died. Property was refurbished and all costs capitalized, and sold in 2019. Never rented . That is why I'm unsure if loss is ordinary or a capital loss . Thanks.

[ATSMAN]

If the property sold was a flip property then it is “ordinary business income/loss.”, otherwise capital gain/loss.

Was any insurance proceeds involved. You have to adjust for that.

[TaxGuyBill]

Just to clarify, it WAS originally a rental when it was first sold in 2016, right?

If so, my first thought is that the 'character' of the property is still a rental, even though the first sale fell through, and I would treat it as such.


You said it had a $400,000 loss? Was there no insurance from the fire?

[Lion]

Did you recalculate your basis at the repossession? Make sure you accounted for the repossession before you tackle the sale. And, has been said, adjust for insurance proceeds.

[MichaelDi09]

If the property sold was a flip property then it is “ordinary business income/loss.”, otherwise capital gain/loss.

Was any insurance proceeds involved. You have to adjust for that.

The property was not repossessed when the fire occurred , still owned by buyer from 2016 sale. And , no insurance claim paid to my client.

[MichaelDi09]

Just to clarify, it WAS originally a rental when it was first sold in 2016, right?

If so, my first thought is that the 'character' of the property is still a rental, even though the first sale fell through, and I would treat it as such.


You said it had a $400,000 loss? Was there no insurance from the fire?

Yes, it was an apartment building rented, at time of sale in 2016.

[MichaelDi09]

Did you recalculate your basis at the repossession? Make sure you accounted for the repossession before you tackle the sale. And, has been said, adjust for insurance proceeds.

Yes, I did recalculate the basis upon repossession , and there were no insurance proceeds to account for.
I think my only concern is was property ready to rent, upon sale this past year, or was it still in a non-usable state? I'll find this out momentarily .

[MichaelDi09]

Yes, I did recalculate the basis upon repossession , and there were no insurance proceeds to account for.
I think my only concern is was property ready to rent, upon sale this past year, or was it still in a non-usable state? I'll find this out momentarily .

The building was still in need of renovations ,at the time client sold last yr. A rental property, just not ready for occupancy.

Does that change type of loss from ordinary to capital loss?