Your question was:

“I had $104,000. that I rolled in to an account with an IRA custodian – it was invested in a “bad” company called “****” my account shows the money as a loss on statement. As well I purchased two out of state properties that appear on my IRA account- both were sold … but no one ever paid for them- can any of this be written off in taxes, even though it is a “traditional IRA ”

The answer:

You can only deduct losses in a traditional IRA to the extent that you close all of your traditional IRAs and the total received as a distribution is less than the total undistributed after-tax contributions.  For example, if you contributed $5,000 in non-deductible contributions and then built it up to $100,000, then you lost it all in a bad investment, all you could deduct when all of your traditional IRAs were closed would be the $5,000 after-tax basis in your account.  Your deduction would be reported as a miscellaneous deduction subject to the 2% of adjusted gross income floor, which means that all of your miscellaneous deductions together must exceed 2% of your adjusted gross income before any of it becomes deductible on your Schedule A.  This may limit further your ability to deduct your losses.

If all of the money in the IRA was pre-tax money (in other words, you deducted the contributions when you made them or were not taxed on the money contributed from an employer, assuming the money came from a former employer plan that was rolled into the traditional IRA), then you would be able to deduct none of your losses at all.  The reason for this is that none of the money in the account was ever taxed in the first place, so therefore you cannot deduct the losses, since to do so would represent a double deduction, once when contributed and again when the money was lost.  The following explanation is found on page 42 of IRS Publication 590, which you can download from www.irs.gov:

Recognizing Losses on Traditional Reporting and Withholding

IRA Investments Requirements for Taxable Amounts

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Example. Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2010 of $2,000. By the end of 2011, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + $400 – $600) at year’s end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).

In 2012, Bill’s IRA has a loss of $500. At the end of that year, Bill’s IRA balance is $1,300 ($1,800 – $500). Bill’s remaining basis in his IRA is $1,500 ($2,000 – $500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2012 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).

The rules for deducting losses in a Roth IRA are similar, except all money contributed to a Roth IRA is, by definition, after-tax money, so the deduction for a Roth IRA loss would be equal to the undistributed contributions to the account, subject to the 2% of adjusted gross income floor as discussed above.

If this seems a bit complicated, unfortunately it is.  It is best to get the advice of a competent CPA to help you with this so that it is done right considering your personal tax situation.  I am unable to give you tax or legal advice, but hopefully I was able to point you in the right direction.

I’m sorry for your loss and I wish you the best of luck in your future investments.

H. Quincy Long – President