Sale of Real Estate at a Loss

[momona]

Taxpayer bought a home in 2005 on Big Island of Hawaii but worked and lived mainly on Oahu where he owns a home. He also lived on Kauai for a while and would commute between Kauai and Hawaii. In the last 5 years, he estimates he lived in the Hawaii home for 80 days. He never rented out this home and it was on the market for a few years. He has another place on the Big Island which has a home and a small farm and grows produce for himself and friends.

He sold the home that he stayed in for 80 days at a loss. I don't think this fits the IRS definition of a residence/second home but I haven't found any guidance on it. I don't think he can take the loss up front, either. I'm not even sure what form I would report it on.

If someone can tell me where I can find IRS definition of a second home, that would be great or if they had a similar situation, how the loss was reported on the 1040, I'd appreciate it.

[DonB]

Taxpayer bought a home in 2005 on Big Island of Hawaii but worked and lived mainly on Oahu where he owns a home. He also lived on Kauai for a while and would commute between Kauai and Hawaii. In the last 5 years, he estimates he lived in the Hawaii home for 80 days. He never rented out this home and it was on the market for a few years. He has another place on the Big Island which has a home and a small farm and grows produce for himself and friends.

He sold the home that he stayed in for 80 days at a loss. I don't think this fits the IRS definition of a residence/second home but I haven't found any guidance on it. I don't think he can take the loss up front, either. I'm not even sure what form I would report it on.

If someone can tell me where I can find IRS definition of a second home, that would be great or if they had a similar situation, how the loss was reported on the 1040, I'd appreciate it.

It all hinges on his intent for this property. Did he purchase it with the intent of holding it as an investment, or for personal reasons. The fact it was never rented, and he lived in it 80 days seems to support it was held for personal reasons. Did he deduct the property taxes or mortgage interest on his 1040 schedule A? If that is the case, no loss is allowed.

[momona]

I thought about the Schedule A angle too. He had three homes with three mortgages and none of them were ever rented out. IRS rules says I can only deduct two mortgages but it is silent on how to determine which mortgage interest to deduct and which one to ignore. There are no limits on real property taxes though so I took all of them on Schedule A.

[taxea]

is the farm earning income? If it does it would be the investment property and the other would be personal property.
Property A personal residence interest and prop tax on Sch A
Property B Farm interest and prop tax go on Sch C or F (if there is income)
Property C 2nd home- interest and prop tax on Sch A sale on D; basis is FMV on DOD of relative; loss not deductible

If farm didn't have income then either B or C could have been considered a 2nd home. I would have taken the higher interest property as the second home. That appears to be B because C probably
doesn't have a mortgage.

[momona]

This is one of those situations where you wish you could give a client better news but research tells you otherwise.

Re: Schedule F or C question on farm, he tried to do that for a while but the cost was so enormous, the losses so huge and the time spent so minimal, I didn't feel that there was any way I could refer to this as a business.

[taxea]

This is one of those situations where you wish you could give a client better news but research tells you otherwise.

Re: Schedule F or C question on farm, he tried to do that for a while but the cost was so enormous, the losses so huge and the time spent so minimal, I didn't feel that there was any way I could refer to this as a business.

That is what happens with Farm startups. How many years was it filed as a farm? Perhaps not enough time was given to make it profitable. There is also the arguement for "intent to earn income".

[Roland Slugg]

Farm? DOD? No mortgage on property C? How much rum have you been adding to all that pineapple juice you've been drinkin', taxea?

momona, based on what you've written, all three places sure seem to be personal residences. They were never rented out, so what's left? You asked about a reference to a source where "personal residence" is defined. You might find something relevant in Code §163.

When there are more than two residences with mortgages, the T/P can pick any two for his interest deduction. The two chosen don't have to be the same every year. Just deduct the two with the most interest paid. (Code §163(h)(4)(B) and Regs §1.163-10T(p)(3)(iv))