Dear Harry: About three years ago, we bought an odd-shaped piece of land in Bucks County. We hoped to be able to build our dream house there next year. In the meantime, we have saved and planned. We just spent $2,500 on legal fees to try to get a zoning variance to be able to build closer to the property line than the rules allow. We were turned down. As a result, we are now trying to sell the property. Its odd shape and the low market today are giving us problems. The best offer we have had so far is about $15,000 less than we paid. And that's without adding our expenses. The lawyer who tried to get the variance told us that we can get a tax deduction for the loss if we report the whole deal as an investment rather than a proposed home. If we sell the property this year, we'll have a lot of time to get all our ducks in a row to show that it was an investment property. Will the IRS be able to prove otherwise since there were no plans to move and we could have been building for a sale to make money?
What Harry says: That lawyer is recommending that you try to deceive the IRS. Don't do it. IRS doesn't have to prove anything. You do. There is unquestionably a lot of evidence of your original intentions regarding the use of the land. You'd have a lot to lose by going this route. A zealous IRS could even go after you for more than civil penalties. Remember: "The moving finger writes, and having writ moves on . . .." You finish the quote.