Loss on sale of land, 2 years after reporting it as a gain?

Forum|Forum|1 year ago
July 17, 2024
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I sold vacant land (not personally used) a couple of years ago. Buyer found problems with land after the sale close and I had to pay back about half of the purchase price to them. I reported the sale and capital gain on my taxes 2 years ago. How do I now report this sizable loss ?

rjs

Employee

The money that you paid back is a "repayment" of an amount that you included in income in an earlier year. Basically you report it as a capital loss on Schedule D in the year that you paid it back. Assuming the amount you paid back is more than $3,000 you would also have the option to claim a credit instead of a capital loss. See "Repayments" on pages 37 - 38 of IRS Publication 525, Taxable and Nontaxable Income.

NOTE: If it was a long-term gain in the year you reported it, and your total income was low enough, some or all of the long-term gain might have been taxed at 0%. In other words, even though you reported the income, you didn't pay tax on all of it. You cannot claim a loss or a credit for repayment of income that you didn't actually pay tax on in the year that you received it.

If you choose to claim the credit, it cannot be entered in TurboTax Online. It can only be entered in the CD/Download TurboTax software because it is not covered in the TurboTax interview. It has to be entered in forms mode, which is not available in TurboTax Online.

JR143Author

Thanks, makes sense.

Do you know how and where one would enter the info into turbotax as a capital loss or credit?

I'm using turbotax premier 2023 (downloaded to PC)

The net amount of the prior long term gain was very close to the amount I refunded (over $3000)

rjs

Employee

You can take either the capital loss or the credit on your 2023 tax return. You should try it out both ways and use whichever makes your 2023 tax lower.

To enter the repayment as a capital loss, enter it as a sale of land. I can't find any official instructions for this type of situation, but here's how I would enter it. For the type of investment select "Land (other investment purpose)." For the description I would write something like "Repayment of 2021 gain." Keep the description short. For the date sold, enter the date that you paid it back. For the acquisition date I would enter the date of the original sale. But I think the type of loss, short-term or long-term, should be the same as the original gain. If it doesn't work out that way, change the acquisition date to make the term come out right. For the proceeds enter the amount that you paid back as a negative number, and for the amount paid enter zero.

Entering the credit is a lot more complicated. First of all you have to calculate the amount of the credit. It's not the amount that you paid back. The credit amount is the difference that it would have made in your tax for the year of the sale if you had not reported the gain that you later had to pay back. TurboTax will not calculate the credit for you. You have to calculate it yourself. To do that you will need the TurboTax software for the year of the sale, and the .tax20yy file for your tax return for that year. Open the tax return and use Save As to save a copy of it with a different name. Work on the copy so that you don't affect the original tax return.

First write down the total tax on the return that you filed for the year of the sale. For 2020, 2021, or 2022 it's Form 1040 line 24. Then change the sale of the land so that the proceeds are only the amount that you got to keep. In other words, subtract the amount that you paid back from the proceeds that you originally reported. TurboTax will recalculate the tax. Take the recalculated tax amount and subtract it from the original tax that you wrote down. The difference is the amount of the credit that you can claim.

To enter the credit in your 2023 tax return you have to go to forms mode. Open the "Form 1040 or Form 1040-SR Worksheet." Scroll way down to the "Other Credits and Payments Smart Worksheet" near the bottom. Enter the credit that you calculated on line D of the "Other Credits and Payments Smart Worksheet." The repayment will then appear on Schedule 3 line 13b, which is "Credit for repayment of amounts included in income from earlier years."