How to use loss for taxes.

[investor123]

I had two investment properties (residential lots) on my personal name and both had separate mortgage. I bought the properties in May 2005, and was paying mortgages until Sept 2008. I just settled with bank paying them $70,000 and dead to both properties. My total loss including down payments, mortgage, settlement, lawyer fees etc is about $200,000 My question is how can I best use this loss for tax purpose. My income from other sources this year will be about $200,000

[Dave T]

You claim your capital loss on Schedule D (1040).  Your loss can be used to offset capital gains in your brokerage account.  If you have a net capital loss on Schedule D, then you can use $3000 of your loss this year to offset your other income.

Net capital losses exceeding $3000 are carried forward to the next tax year when they are first used to offset capital gains and then up to $3000 of ordinary income.

Consult your tax advisor for specific details.

[investor123]

Dave,
Thanks for the quick reply, is there any way to claim more loss as I do not have any capital gains. At this rate, it will take me long long time to recover.

[mcwagner]

nope.  you and everyone else right now.

[Dave T]

At this rate, it will take me long long time to recover.

If "recover" to you means that you will eventually get $200K in tax savings for your $200K loss then you need to appreciate the effect of a capital loss on your tax liability.

If you are in the 25% tax bracket, then a taxable capital loss of $200K will translate to a $50K reduction in your tax bill.  Since you can only use $3000 of net capital loss per year against your other ordinary income, it will take you sixty-seven years to claim the entire $200K capital loss.  When all is said and done, you will have recovered only $50K of your loss through reductions in your income tax bill assuming you stay in the 25% tax bracket the entire time.

The news could get worse.  Let's say you don't live long enough to claim the entire $200K loss.  The tax return your estate executor will file for you for the year of your death can only take a $3000 net capital loss against ordinary income.  Whatever losses you have left over after your final tax return are lost forever.