“Throwing in the Towel” – Tax Planning Opportunities Associated with the Abandonment of Property

Published By Timothy D. Brown

“Throwing in the Towel” – Tax Planning Opportunities Associated with the Abandonment of Property

Between the current credit crunch and the decline in property values, many companies are struggling, especially those heavily invested in real estate. As a result, many investors are asking themselves whether the time is right to “throw in the towel.” Although abandoning real property or an interest in a partnership gives rise to a host of legal and financial considerations, careful tax planning for such an “abandonment” can result in the ability to claim an ordinary loss for federal income tax purposes.

Internal Revenue Code (“IRC”) § 165 allows taxpayers to claim a deduction for any “loss sustained
during the taxable year and not compensated for by insurance or otherwise.” In the case of individual taxpayers, the loss must be a business loss, a loss incurred in connection with a transaction entered into for profit, or a casualty or theft loss. IRC § 165(c).

In general, losses arising from a capital asset, such as a real estate project or a partnership interest, are
capital losses that may only be used to offset capital gain. See IRC § 165(f). However, if a real estate project or partnership interest is “abandoned” for tax purposes, the taxpayer may be able to treat the loss as an ordinary loss and use it to offset ordinary income. Id.

An abandonment loss requires both an intent to abandon an asset and an affirmative act of abandonment. See, e.g., Echols v. Comm’r, 935 F.2d 703 (5th Cir. 1991). In addition, the loss must be
“evidenced by closed and completed transactions, fixed by identifiable events, and … actually sustained during the taxable year.” Treasury Regulation (“Treas. Reg.”) § 1.165-1(b). Whether an “abandonment” meets these requirements is determined on the basis of all of the facts and circumstances


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