Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
Q: I operate a business and also have a full-time job. I've had losses in my business in each of the past three years. Am I allowed to take another loss? I've heard that you cannot take a loss in a business more than three years in a row.
A: Generally speaking you cannot take another loss. Profit must be the primary motive for the business, and the IRS presumes that there is a profit motive only if a business shows a profit for any three or more of five consecutive years ending in the year of the loss. If you are breeding, showing or racing horses, you must have a profit in two out of seven years. Based on your facts and circumstances, you may be able to overcome the presumption of "no profit motive" and be allowed the loss. However, it is extremely hard to do.
Q: In April I sold my townhouse for a significant gain. How long do I have to buy a new home to avoid paying taxes on the gain?
A: To avoid tax on your capital gain, you must purchase another residence within two years after the date you sold your townhouse. You may have to recognize some gain if the cost of your replacement home is less than the sales price of your townhouse. By the way, you could also have purchased a new principal residence up to two years before you sold your townhouse.
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.
Members of the Maryland Association of Certified Public Accountants will answer tax questions from readers until April 15 and also offer a Tax Tip of the Week.
To submit a question, 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 848-0338. Using a touch-tone phone, enter 6225 after the greeting. Push 1 to submit a tax question; state the question in full. Push 2 to hear the tax tip. Selected questions will be answered in the Business section.