LLC Loss - How to take the loss? One year or spread out on taxes?

[Patty Puckett]

Our LLC bought a Multifamily zoned property to build a subdivision. We spent about $100,000 with all the costs to get to the PUD Tentative map stage. We decided because of health issues not to build and to sell. Then the market dropped. We have had on the market for 8 years and are now taking a loss on everything about $40,000 on the land and $100,000 on the costs to get it to the tentative map stage. How do we write off the loss? We didn't take the loss through the years for the original cost, just the operating cost like taxes and utilities. Our LLC name has Properties in it, no other business.

One CPA says we can take the loss in one year.  The other CPA says we have to spread it $3,000 a year until we reach the loss total or against any capital gains.  Which is correct? 

Thanks Patty

[Ashish Acharya]

@Patty Puckett, 

I think what You CPAs were trying to say was either to treat it as 

1) ordinary loss - no limitation on deduction. 

2) capital loss- limited to 3000 every year. Even if this is the correct treatment, it might be good time to sell some of your property so that all the capital gain is offseted by the entire loss. The capital loss eats your gain, there is no limitation. 

I don’t know much about your situation but if you have well documented intention of development plan, and didn’t hold the property for an appreciation, ordinary loss treatment would be ok. 

It also depends on your other activities, do you do many flips or developments, or your portfolio is mainly buy on holds? Court is going to look at those activities to match your treatment on this loss. 

If all of your activity is buy and holds, court might say it’s a capital loss. 

Court is going to want to treat it as capital loss to limit you to take entire loss. However, if you had a true Intention of development, the ordinary loss will prevail. 

This opinion is strictly based on general assumptions. 

Hope that is helpful.