Loss on Leasehold Interest

Today TaxMama hears from Gordon in the Tax Quips Forum, who wants fairness. “In 1996 I purchased a leasehold interest in a lot in a recreational vehicle park.  The lot is on leased land owned by someone else.  Since there was actually no real property I assumed I would not have to pay capital gains taxes when I decided to sell it.  I discovered several years ago that the IRS considers leasehold interests to be capital investments, which are, therefore, subject to capital gains tax upon sale.  The upshot is that the lease is approaching expiration and the owners have decided not to renew it, offering no compensation to those of us who have invested in the park.  Yes, there is a lawsuit underway but that is another subject.  My question is: Can I claim a capital investment loss since my leasehold interest has essentially been disposed of without my consent, eliminating the opportunity for me to sell it and recover my investment?”

 Dear Gordon,

The wonderful thing about our tax system is that we must pay taxes on the profits of anything we sell.

Does the same thing apply with respect to deducting our losses? Nope.

Losses on the sale of personal assets are generally not deductible. Consider the losses on the sale of a home. Not deductible. Consider the losses on sales of household goods (garage sales). Nope! But the sales must be reported – showing zero profit.

So, how does that apply to your leasehold? Well, it sounds like this was purchase for personal use. You mention a recreational vehicle – which sounds like fun. So, if you sell it at a profit, the sale is taxable.

Now…even if you were to sell it, how would you compute your basis (or tax cost)? When you buy a leasehold, you buy a right to use something for a specific period of time. So when you sell the leasehold, you are only selling the right to use it for the remaining months of the lease.

Suppose you were to have sold it in 2006. You had bought a 15-year right. In 2006, there were still 5 years left to go. Your basis would have been 1/3 of your purchase price (5/15). When the leasehold ends this year, your basis is 0 (or 0/15).

So, unfortunately, there is no loss to report.  You will have used up all the months of your leasehold when it expires. You never had a investment. All you had was a rental agreement.

Good luck in trying to get it renewed or getting compensated.

And remember, you can find answers to all kinds of questions about capital losses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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