Offsetting Stock Losses
Excellent forum. Thanks in advance for your answers.
I have substantial unrealized mutual fund and stock losses that I would like to use to offset an unrealized gain from a recently completed rehab of an apartment building. Unfortunately I just bought the building 3 months ago and the gain from a sale would be ordinary income via Form 4797, Part II.
Any ideas (other than a 1031)?
Unrealized gains are not taxable. Do you have to sell?
Why not hold the property as an investment for at least one year? Then when you do sell, take advantage of the long term capital gains tax rate or defer the taxes indefinitely with a 1031 like-kind exchange.
If your sole purpose is to shelter potential profits from capital gains taxes, then don't sell if you have no other compelling reason to do so.[ Edited by DaveT on Date 04/03/2003 ]
DaveT, thanks for your response.
As you correctly point out, my options are:
1) Sell now and take the gain as ordinary income
2) Sell after a one year holding period and thus create a capital gain that can be offset by those stock losses
3) Do a 1031 exchange, or
4) Just hold the property and keep the gain unrealized
The short explanation for why I want to sell is that I have an alternate (non Real Estate) location I would like to place this particular chunk of money in, thus ruling out the last 3 options.
So given the hypothetical constraint that I must sell now, can you think of a way to make a capital gain out of this unrealized short term rental real estate gain?
Thanks again.
Consult with your tax advisor on this one.
If you have recently completed the rehab, and you have not placed the property in service as rental property, then I suspect that you could just report the sale of this property on Schedule D, and take a short term capital gain, rather than using Form 4797.
My argument would be that the property was purchased as an investment property, rehabbed to improve its value and to increase your potential cash flow from higher rents, and your intention was to place it in service as a rental property.
I think DaveT is correct here. You can probably report it as a short-term capital gain if you sold the property and thus it would offset the capital losses you have.
This assumes you do not do a lot of rehabbing projects each year (nor do you earn all of your income from rehabbing and reselling). If you do, then the gain on the sale would be ordinary income, not capital gains and you would not be able to use the capital losses (except to the extent of your capital gains + $3,000 per year).
If you do a lot of rehab projects, trying to argue that you have purchased the property for "investment purposes" will only make your IRS auditor laugh, as he/she adjusts your taxes and maybe asks (demands) you to pay a 20% penalty because you have a substantial understatement of income or a negligent filing. Believe me, I have talked to a few clients that had some of these auditors laugh in their face (and thus the reason for seeing me ... because the auditor pissed them off and they wanted to fight it; after evaluating their case, I told them they would be throwing good money after bad money because it was highly unlikely they would win on their arguments in court).
Taxjunkie