Bought and sold investment property the same year and some complication

[hamida_surti]

Hi, I have client who bought an investment property (Property A) from a property managment/Real estate company for X amount of money. The management company rented it for the client, however for whatever reason, the tenant never paid any rent, and when served to vacate the premises, trashed the property prior to leaving about six months later (all in the same tax year). The client quit claimed the  property (A) back to the management company for $10.00 and the management company quit claimed another property (B) in my client's favor for $10.00.

Is property A considered a sale of property for $10.00 and considered ordinary loss (Not a real estate professional) the difference between the original purchase price and the sale at $10.00? What about property B? Is the basis then $10.00? No section 1031 involved.

Please help me figure out how to report the transaction in proconnect tax and for tax purposes

[hamida_surti]

Do I need to create a short term capital loss for property A and take the three thousand $ loss deduction this year and going forward. The new property, Property B would be listed for $10.00 and depreciated over 27.5 years? 

Does anyone disagree. Please share your thoughts.

[BobKamman · Accepted solution]

I doubt this is a licensed "property management company."   The client is still doing business with them after the loss on the first property?  They must be exceptional salespeople.  

I would claim the operating expenses for the "rental" of Property A, on Schedule E.  Then I would claim the basis of Property B as whatever was paid for Property A.  The $10 amounts shown on quitclaim deeds is irrelevant.  Substance over form.  Taxpayer bought a property from the seller, with the understanding that it would make money.  When the first property didn't meet that condition, seller delivered a replacement property for the same price.