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S-Corp Long-Term Capital Loss

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    S-Corp Long-Term Capital Loss

    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?
    "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

    #2
    Originally posted by JohnH View Post
    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?
    Nope. See Section 165(g)(1). It's treated as a sale of a capital asset under the circumstances. It does not qualify for ordinary loss under Sect 165(g)(3) as it does not fit those qualifications based on the information given. Ask him where (code section) he is getting this information.

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      #3
      Thank you for the confirmation, Burke. I suspect the HRB guy was just throwing out possibilities, or perhaps the client only heard what he wanted to hear. But just the same, I wanted to know if there was any possibility I might be missing something. I appreciate your response and the cite.
      "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

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