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  1. #1
    Join Date
    Oct 2014
    Posts
    8,238

    Default Re: Can You Get a Tax Deduction After Losing Real Estate to Tax Foreclosure

    Quote Quoting beekrock
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    Thanks for the info, Taxing Matters.

    I wanted to keep the liens and tax sale foreclosure off of my credit reports and out of my personal name. My idea was to sell the lot to a corporate entity (one that would work for tax loss purposes) for $1. In this case, wouldn't $1 be the fair market value if that's what the corporate entity buys it for?
    If you form a LLC in the U.S. with you as the sole member then for federal tax purposes that LLC is disregarded and it is treated as though you directly own the property of the LLC unless you elect for the entity to be treated as a corporation for federal tax purposes. So in your initial post, your suggestion of using a LLC does you no good for tax purposes because the property is seen for federal tax purposes as still owned by you directly. Thus the tax results are exactly the same as they would be if you simply kept the property in your own name. Transfer to the LLC might keep the tax liens off your credit report; I’ll not opine on that.

    If you form a corporation (or a LLC that you elect to be treated as a corporation) and then transfer it to the LLC for $1 the IRS is likely to say that the transfer is not really a bona fide sale at all but rather effectively a contribution of the property to the corporation in exchange for the stock of the corporation. Indeed, that is pretty much the usual result when the consideration provided is nominal and the transaction is between related parties. That sort of contribution to the corporation is tax free and you end up taking a basis in the stock equal to the basis of the property contributed to the corporation. The corporation would then have the same basis in the property that you had. The corporation will then incur any loss on the foreclosure.

    The problem is that if the corporation is a C corporation the capital loss realized can only offset any capital gain of the corporation. If you transfer if to the corporation simply for this one foreclosure event, the corporation will not have any capital gain to offset the loss and the foreclosure itself would not help you at all with reducing tax. Then you have to unload the corporate stock to realize any loss on your personal return, which is an extra needless step with potential complications that you’d not have if you simply realized the loss directly by holding the property yourself or holding through a LLC that is disregarded.

    If the corporation were a S-corporation then the result will end up effectively the same as in the LLC situation — the corporation’s loss flows through to your personal return and offsets any capital gain you have and, if loss still exists after that, up to $3,000 of ordinary income my be offset by the loss. And excess loss over that gets carried over to the next year.

    But the bottom line here is that you won’t get to gin this up as a sale to the entity for $1 to realize the loss this year before the foreclosure occurs, which is what I gather you were hoping to do. As I said initially, the amount of the ultimate loss here will end up being the same regardless of whether you hold it directly when it is foreclosed or if you transfer it to some entity you wholly own when the property is foreclosed. The timing of the loss will end up being no earlier than the year the foreclosure occurs and you lose the property. The IRS and the courts have seen many attempts by taxpayers to abuse corporate entities to gin up losses over the past century and the tax law has developed to prevent that sort of abuse.

    I suggest you keep it simple. Either keep it in your name or transfer it to a LLC that is disregarded for federal tax purposes. That will get you the loss when the tax foreclosure occurs with a minimum of cost and trouble, and if you use the LLC you may avoid a hit to the credit report. But transferring the land to a corporation (or LLC or other entity that you elect to have treated as a corporation) is a bad idea that may prevent you from taking the loss you want to take, or at least delay realization of the loss.


  2. #2
    Join Date
    Feb 2005
    Posts
    116

    Default Re: Can You Get a Tax Deduction After Losing Real Estate to Tax Foreclosure

    That response couldn't have been more thorough and answered my questions exactly! Thank you so much for taking the time, Taxing Matters!

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