Investment Property

[Cheryl48]

Got some gray area going....

Background: I "inherited" about 200 clients from a colleague who retired last year. She had done taxes for about 40 years, so I now have whole family groups of returns to do.

Two of her clients purchased a cottage "up north" in need of work for $90,000. For three or four years, tax preparer had written off mileage (500 miles per round trip, about 6 trips a year) on Schedule A as an investment expense. They did put about $10,000 (materials) into the cottage while doing the labor themselves.

The family did go up there also on weekends and stayed at the cottage. I am very uneasy about writing off the mileage as an investment expense. There was no attempt to ever rent the place. That was last year.....

This year: Client just informed me that they sold the cottage last month at a loss. He said that the intent all along was to fix up the cottage and flip it, but the economy tanked (here is Michigan, it has more than tanked) and they were finally able to sell it for about $ 75,000.

My question in light of the new info about intent to flip the property.... in next years tax return should I show the sale as a loss on Schedule D? What about mileage from this year?

Any discussion/help would be greatly appreciated....

[Possi]

sounds like a 2nd home to me

I'm probably wrong, but it sounds like a second home to me.

If it is, you cannot take a loss, but use the expenses to bring any gain to zero.

If it is truly investment property, maybe you can take the loss next year. Since they didn't rent it, and they never intended to, I just don't see how you can justify a Sch D loss.

I had a client one miserable year who wrote off lots of deductions for a hunting club. I'm glad he went elsewhere the next year.

Inherited clients can be a bear, following someone else's lead.. especially when it goes into the woods sometimes...

So, what will "our people" say about this? Sch D loss or 2nd home wash?

We'll see...

[Burke]

If they owned the cottage for 3 or 4 years, it doesn't really sound like it was intended to be "flipped." They could have done so that long ago for a profit. It sounds more like a vacation property to me.

[Cheryl48]

I thought it was

a second home also, but today the flip came into the discussion. Talked to the son today and father will be in next week. That is the problem. They will talk and the spin may be different next week. UGH!

I can understand why they weren't able to sell the place. Our real estate market in Michigan has been horrible. Very little is selling around here (down state Michigan) and northern Michigan has been hit even harder. My home has gone down in value 40% in the last four years ( and I've only been in it 4.5).

Thanks for the input!

[Burke]

The fact that "they went up there also on weekends and stayed at the cottage" indicates it was probably a second home. I would ask for documentation to the fact that it was put on the market, actually listed with a broker, advertised for sale, etc. to show the intent was to flip it, and WHEN that actually occurred. The personal use should disqualify it altogether as a strictly investment property.

[Cheryl48]

Thank you!

I read today's client the Tax Book about investment expenses, told him I'd inquire on the mesage board. Think he'll be OK with it all....

See what dad says next week. I just don't want to be debating..... too busy with other clients.