The loss is nondeductible - Posted by Dave T
Posted by Dave T on May 21, 1999 at 01:41:52:
Any loss on the sale of a personal residence is nondeductible as it is considered a “personal, living, or family” expense. [Secs 1001©;262;1.262-1(b)(4);1.165-9(a)]
While converting a home into a rental makes the loss deductible [Sec 165©(1) and (2)], if rented for less than three years, it is unclear what is the length of time before a personal residence becomes a rental, although the antithesis is known – if the home is rented for less than three of the last five years before sale, Sec 121 considers it a personal residence. One argument for the taxpayer – how a residence is being used at the date of sale is of major importance in determining whether property is business or personal [US v Winthrop, (5 Cir. 1969), 417 F2d 905]. Therefore, the taxpayer must prove that the property is a rental when sold, and the conversion is not done for tax purposes only [William C Harriman, 17 TC 903(1951)].
If the residence is rented for more than three years, prior to the sale date, under Sec 121, it automatically converts to rental property.
The adjusted basis for determining loss for property converted from personal use is the smaller of (1) the fair market value of the property at the time of conversion, or (2) the adjusted basis of the property at the time of conversion. Therefore, loss created prior to conversion is still not deductible either at the time of conversion or at the time of sale [Sec 1.165-9(b)(2)].