Carried Losses: When A Loss Becomes A Win

The regulations regarding the tax impact of real property ownership, sales and exchanges are complex and confusing.

What business owner or investor would dare prepare his own tax returns in this day and age? The consequences of just a single error can be catastrophic.

So, most of us turn to the experts to help us navigate the minefield that is the tax code. However, not all the regulations codified by our friends at the IRS are bad for taxpayers, especially when it comes to the recognition of taxable income and losses.

Let’s take a look at how you might be able to turn a loss into a win when disposing of an industrial property.

Exchange Provisions

Most industrial buildings that change hands do so through the IRC’s 1031 exchange provisions.

A property is sold, the proceeds are held by a third party and then are subsequently reinvested in another property, deferring all or a portion of the federal and state taxes that, which can include capital gains taxes, depreciation-recapture taxes and a new tax to support the Affordable Care Act.

The specter of such a heavy tax burden has most investors crossing an outright sale off their list of viable options. They just refuse to give away that much of their hard-earned money and choose to keep a property that they would rather sell.

This is one of the main reasons why the inventory of industrial properties is running so thin.

Carried Losses

However, as advantageous as the exchange provisions can be, it’s not always the best option, especially when the seller of a property has capital losses that can be taken in the same tax year as the real property sale.

It could be that you have carried forward losses from previous tax years that could be used to offset the gain on the sale of your real estate. The rules are specific and you should look to your tax pro for advice, but it may be that your best alternative could be to sell outright and then reinvest the after-tax proceeds into an alternative investment, establishing a new and higher basis.

Exchanging property only defers taxes. It doesn’t make them go away.

The sad truth is that you actually have to die to outrun the IRS. More on that topic another time. For more information on carried losses, give us a call. We are here to help.