Is is allowable to deduct losses from a partnerhsip that was formed to buy and develop a piece of real estate? I was a partner in an LLC that was under contract to buy a piece of land. We spent quite a bit of money on legal fees, engineering etc. before backing out of the contract. Is that loss deductible against ordinary income?

It would seem that the Partnership has incurred expenses in connection with the production of income. Clearly, if the partnership were to have purchased the land, these costs would have been capitalized and then amortized, in my opinion.

However, I think as the deal did not go through, these expenses could be expensed currently in the year incurred and losses of the partnership would then be limited to the extent of the basis limitations rule. Each partner would then report their respective share of the losses subject to having sufficient basis to deduct the losses.

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