How does abandonment losses work in taxation?
In: Economics
An abandonment loss is when the owner of a capital asset (like land, buildings, machinery, etc.) deliberately gives up possession and ownership and discontinues his or her use of property, without transferring title of the property to another person or entity. Basically, they walk away from it and say, “I don’t care what happens to it now, but it isn’t mine anymore.”
How they are treated for tax purposes depends on whether or not they get any compensation for doing so. If they do **not** get any form of compensation, then they are able to treat it as an ordinary loss and take a tax deduction for the remaining asset value in that tax year. So if you have a $50k piece of property you abandon, you get a $50k loss you can deduct from income or capital gains that year.
However, if you take even $0.01 in compensation for abandoning that property, it becomes a capital loss. Capital loss deductions are strictly limited to offsetting a capital gains and up to $3,000 of ordinary income.
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