Take a Lesson From the Rich: Turn a Loss Into an Asset
Some of the richest people in the world lost millions, maybe billions this year, and they’re still smiling. What do they know that you don’t know?
The secret is simple. They know how to turn a loss into an asset.
If you’re like a lot of small business owners that I meet, you probably missed a lot of deductions when you first started your business. Did you remember to take the deduction for the fax machine, printer, copier, desk, computer, cell phone, and all those supplies when you first started your business? You might have reasoned that it didn’t matter because you had a loss anyway.
That’s one end of the spectrum. I’ve also met with new clients who have gone nuts with accelerating deductions (a good technique in the right circumstances) and now have a bunch of suspended losses. When you have a suspended loss that means that while your tax return shows a loss, you didn’t get to take any benefit from it. I hate suspended losses, because once they’re locked up it’s often hard to get to those losses unless you actually sell the business or investments.
With any loss, first consider whether you can take advantage of it. Some of the things to consider: type of investment (real estate has loss limitations, paper investments have even more limitations), other income that you want to offset from a business/investment loss (typically this is W-2 income) and what is your basis in the business/investment (without basis, you can’t take a loss).
The easiest loss to take advantage of is a business loss. If you end up with a Net Operating Loss (NOL) for the year, this loss can usually be carried back or carried forward. That means you might get the immediate benefit of the loss against taxes you paid in the past (ie, a refund check in 30 days or so) or against taxes you’re going to pay in the future year.
A loss can be just like money in the bank. Get good advice if you are looking at losses. Just like there are strategies for keeping more of the money you make, there are also strategies for turning losses into gold.
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Question on turning losses into assets:
I own a 2nd trust deed note that is in default (there is negative equity below the 1st and I can only go after the property) AND my 2nd will be getting foreclosed out by the 1st lender soon,
Question— after foreclosure is this a long term capital loss I can only take $3000 per year? if so, what if I “sold” that Note before foreclosure at a 95% discount to one of my entities or a friend, then can I take the whole loss on the difference between the sales price and the original loan “purchase price” amount; or is it still a long term cap loss?
How can I take the entire loss?
Could I take a deed in lieu and list it as an investment property on a Sch E? Would this work (using my loan amount plus the 1st loan as the purchase price, then when it gets foreclosed out by the first lender the disposition price would be the 1st loan amount (or less) —would that work?
Thanks for your input.
You’ve got a good question here.
The issue, which I think you know, is that the trust deed note is a capital asset. That means if you sell /let it go/whatever, and you have a loss, then you have a capital loss and you’re limited to $3K/year.
A few follow up questions: Was this from a property that you sold? If so, we may be able to go back and modify the sales price and get at the loss that way.
If it was a regular loan, can we make the argument that you are in the trade or business or lending money? (In other words you regularly do these type of transactions)
Do you have a business otherwise that happens to operate in a C Corporation? i don’t know how much we’re talking about here, but one strategy could be to sell it to the C Corporation (need to do this arm’s length and that could be harder to prove, though) and then take the bulk of the loss there. There is no limitation on capital loss in the C Corporation.
And then of course, there is the old tried and true: Do you have any capital gains that you could use to offset?
It was a regular loan, not seller carry back, and YES I can say I am in the biz of making loans cause I did a bunch to this investor, unfortunately all on CA properties all under water and (he was a RE broker and mortgage broker and lost all means of making a living over night), and all my fabulous 15% interest payments for the past 4 years went away over night—-ouch…along with the equity…double ouch….so yes I can form a new entity quickly, and sell it all to it, or I currently have a S corp and a single member LLC; can I use either? —I was actually thinking about revoking my S status this month to keep my K-1 income out of my tax return, but if I get to take some of these losses I will keep it an S at least for 08. Can I use my single member LLC? (wouldn’t that be reported essentially on a sch c ?)
—I could add my S corp as a member to make it a partnership LLC—would that be better?
Would 95% discount be an arms length sales price on a failing Note? I have 5 notes each around $40,000. yes they are all bad…..
—however it was great while it lasted..
I was also thinking of a way to recoup unused suspended losses on our rental properties that are really going no where (but down), by selling them to my S Corp or LLC creating a disposition to take ALL the suspended losses against other income. Those of us that are avoiding the audit trap of the RE Professional status, have a ton of suspended losses. What do you think about that?
I have a separate unrelated question that may belong in another category—when an S Corp files bk, is there debt relief that becomes taxable income to the individual shareholders, since it is a flow through entity?
Good questions all - I’m going to start some threads on this at the First Class Lounge forum.
How do I find the new threads-I looked through all the forum topics and can’t find yours on this subject. Which topic did you start the posts under? thanks
In general, do a search above with key words. In this case, it wouldn’t have done you any good because I dropped the ball!
Last week was the busiest pre-tax season week I’ve ever had. I think there is so much uncertainty with next year’s tax changes that everybody is making sure that they’ve got all their ducks in a row early. That’s good news but it’s created some crazy timing issues for me.
So, my mistake. I will get this done later today - if I don’t drop me a PM! (private message)