Tax Answers

April 02, 1994

Here is an answer from members of the Maryland Association of Certified Public Accountants to a reader's tax question. The Sun will publish answers through April 15.

Q. If I lost money on a limited partnership that is part of an IRA, can I take the loss as a deduction in 1993 or do I have to wait till I start drawing the money out of the IRA and take the loss then?

A. You probably cannot deduct it, because losses in IRA investments can only be recognized if nondeductible contributions have been made, and there is a "basis." In the case where there is basis, and a loss on your IRA investment, the loss can be recognized only when all the amounts in all IRA accounts have been distributed, and the total distributions are less than your unrecovered basis. The loss is claimed as a miscellaneous itemized deduction, subject to the 2 percent limit, on Schedule A.

Here's an example to illustrate this situation: Let's say Joe Saveall made nondeductible contributions to an IRA of $2,000, giving him a basis of $2,000. The next year his IRA earned $400 interest and Joe withdrew $600, reducing the value of the IRA to $1,800 (and the basis to $1,500, as calculated on Form 8606). One year later the IRA has a loss of $500, so that the IRA balance is $1,300, and the basis is $1,500. If Joe takes out the balance of the IRA, he can recognize the $200 loss. (If Joe's IRA had been deductible, no loss would be allowed, because there would have been no basis.)

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary. Consult with a tax adviser for specific advice.

Readers may submit questions by phone, mail or fax. Selected questions will be answered in The Sun and The Evening Sun.

To ask a tax question by phone, call Sundial, The Sun's telephone information service, at (410) 783-1800. In Anne Arundel County call 268-7736, in Harford County 836-5028, and in Carroll County 848-0338. Using a touch-tone phone, enter 6120 after the greeting.

Written queries may be sent to TAX QUESTIONS, The Baltimore Sun, Business News Department, 501 N. Calvert St., Baltimore 21278. Fax questions to the Business News Department at (410) 783-2517. Callers are encouraged to leave their names and phone numbers.

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