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Tax Court: Lackluster Attempts to Rent Vacation Condo Precludes Deductions.

(Parker Tax Publishing June 9, 2015)

The Tax Court held that because taxpayers made minimal efforts to rent out their former vacation home, the condo had not been converted for an income-producing purpose and thus taxpayers could not take deductions for rental expenses or a loss on the property's sale. Redisch v. Comm'r, T.C. Memo. 2015-95.

Background

Between April 2003 and December 2010 Robert and Pamela Redisch purchased and sold two pieces of property in Hammock Dunes, a luxury oceanfront community under development in Florida. In 2002 they rented a golf villa and, after enjoying their stay, decided to purchase land in the community with the intention of building a seasonal residence. After spending more time as renters at Hammock Dunes, the Redisches decided to sell the land and buy an oceanfront condo instead. In 2004 they purchased a condo in one of the community's buildings (Porto Mar) for $875,000, which became a seasonal home for them and their daughter.

After their daughter's tragic death in 2006, the Redisches stopped staying at Porto Mar. Rather than immediately selling the property, the couple decided to rent it out to generate cash in the short term, believing that they could sell it later at a profit. The Redisches continued to visit Hammock Dunes, staying with a friend as a guest for weeks or months at a time.

In 2008 the Redisches listed Porto Mar with the Hammock Dunes realty office, removed most of their personal belongings and changed one of the bedrooms into a child's room at the suggestion of a real estate agent. The realtors featured Porto Mar in a portfolio of rental properties and told prospective land purchasers the condo was available to rent while building. The Redisches received inquiries from only two potential renters. Neither rented the property or even qualified as potential tenants (one wanted it for only two months and the other had a large dog; both situations conflicted with building restrictions).

In June 2009, acknowledging a lack of rental activity, the Redishes listed Porto Mar with another agent for either rental or sale. Later, as other units in the building went into foreclosure, the Redisches reduced the sales price of their unit and in 2010 sold Porto Mar for $725,000.

The Redisches filed joint returns for 2009 and 2010, including in each return a Schedule E, Supplemental Income and Loss, claiming losses related to the attempt to rent Porto Mar in 2009 and its sale in 2010. The IRS assessed deficiencies for 2009 and 2010 in the amounts of $77,793 and $89,155, respectively, plus accuracy-related penalties under Code Sec. 6662(a).

Analysis

Under Code Sec. 212 an individual can deduct expenses incurred during the taxable year for property held for the production of income. Code Sec. 165 (a) allows a loss to be deducted if incurred during a taxable year in any transaction entered into for profit and not otherwise compensated. An individual can claim a loss on property purchased or constructed as a primary residence if, before its sale, it is rented or otherwise used for an income-producing purpose and this use continues up to the time of sale. Reg. Sec. 1.165-9(b). Under both sections the profit motive must be the taxpayer's primary purpose.

The Tax Court has identified five factors relevant to determining if a taxpayer had a profit motive when considering whether residential property has been converted to an income producing purpose:

(1) length of time the house was occupied by the individual as his residence before placing it on the market for sale;

(2) whether the individual permanently abandoned all further personal use of the house;

(3) character of the property (recreational or otherwise);

(4) offers to rent; and

(5) offers to sell (Grant v. Comm'r, 84 T.C. 809 (1985)).

The Tax Court noted the Redisches initially bought property in the Hammock Dunes community intending to build a home, but instead purchased the Porto Mar condo. The court found they used the Porto Mar property as a seasonal home for four years before abandoning their personal use of it in 2008. Despite frequenting Hammock Dunes in later years, the Redishes never resided in the Porto Mar condo, staying with friends instead.

Although the couple planned to rent the condo, the tax court found their attempts were lackluster at best. The court noted that while Mr. Redisch testified that he signed a one-year agreement with a realty company, he did not provide any other evidence of such an agreement. Even if he had produced the contract, the court pointed out that the efforts of the realty company to rent out the Porto Mar property were limited to featuring it in a portfolio kept in the company's office and telling prospective buyers that it was available when showing it as a model. The court found it unsurprising that the minimal effort yielded only minimal interest; only two potential renters inquired about the condo, and both had interests that conflicted with building restrictions.

The court noted Mr. Redisch did not testify regarding any other tactics that he attempted to employ to rent out the Porto Mar property, other than getting a new real estate agent in 2009. Additionally, the court found Mr. Redisch did not provide any evidence, beyond a copy of a multiple listing service listing of the Porto Mar property, of the actions taken by the second agent to rent out the home.

Accordingly, the Tax Court determined that the Redisches did not make a bona fide attempt to rent out the Porto Mar property and therefore did not convert it to one held for the production of income. The Tax Court held that the Redisches were not entitled to their claimed losses and upheld accuracy-related penalties for 2009 and 2010.

For a discussion of rental income and expenses, see Parker Tax ¶ 86,105. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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