Investment home to personal home briefly

[BP.]

A few years ago taxpayer bought a parcel of land and built a house on it, planning to sell it. It was the one and only time he did this, and he had no intention of doing it again.

The house sat vacant; no buyers.

Last year, he and his wife moved from their main home into this house. They planned on selling their former home and making the new home their principal residence.

They then got an offer on the new house, sold it at a loss, and moved back into their former residence. All of this happened over the course of a few months in 2013.

Has this former investment property been transformed into personal property with a non-deductible loss?

Thanks!

[Koss]

Principal Residence

Because their occupancy was so short, and because they did not sell or rent out their original home, I suppose you could reasonably take the position that they occupied the house only as a temporary residence, and that the original house never ceased to be their principal residence.

It is certainly a gray case.

The personal residence has a special place in the tax law, presumably because of the special treatment for capital gain. It actually makes sense that if you can exclude a gain, then you can't take a loss.

But if you abstract away from the personal residence, there are many assets that could arguably be "held for investment," while occasionally being used personally.

Suppose I buy an antique car. If I take it out for a drive a couple times a year, or take it to a show, does that transform it into personal use property?

What about artwork? If I hang it on my wall, and look at it every day, does it cease to be property that is held for investment?

The house that they sold was arguably their second home. It wasn't a "vacation home" in an exotic locale. But it was still a home. The brief duration of the occupancy supports treating it as a second home. A second home is not eligible for exclusion of gain, so the loss would likewise be deductible.

It's a tough call.

I never tell a client to take a position that I think is improper, or contrary to the law, just because they will probably "get away with it." That would be unethical.

But when something falls into a gray area like this, it is appropriate to consider the probability of whether it will be challenged by the IRS. The client's level of risk tolerance--and that of the tax pro--may influence the decision.

This sort of thing is likely to fly under the radar, don't you think?

Did they ever change their driver's license, voter registration, or anything else that can be used to determine domicile?

BMK

[ATSMAN]

Don't we have to worry about 10% of personal use in a 12 month period limitation. So 36 days or more personal use in a year would make it personal use property!

[Koss]

Days of personal use

Doesn't the ten percent personal use rule apply only to rental property?

BMK

[BP.]

Delightful post, Burton. Thanks for taking the time to share your thoughts. No, they never did change DL, address, etc. Client comfortable with investment treatment. They didn't even have time to move most of their belongings from the original house.