Many have heard that it is possible to abandon a failed investment in order to recognize a tax loss without actually selling the investment. For example, a partner in a partnership owning an underwater property might desire to abandon its partnership interest and recognize a loss. However, most people do not realize how hard that can be to accomplish! A recent memorandum by the IRS Office of Chief Counsel provides taxpayers with a reminder of the circumstances in which a loss may be recognized upon abandonment of property.
Background
Internal Revenue Code section 165 allows a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." In the case of an individual, this deduction is limited to (i) losses incurred in a trade or business, (ii) losses incurred in a transaction entered into for profit (although not connected with a trade or business), and (iii) certain casualty losses. A deduction for a loss under section 165 is allowable only in the year in which the loss is sustained. The amount of the deduction is equal to the taxpayer’s adjusted basis in the property.
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