Taxpayers (husband and wife) have asked me for tax planning advice for their MFJ return. They own a second residence. The taxpayers have not ever used the second residence for vacation purposes, and they have never rented it. The property has been vacant for many years. Now, they plan to sell the property and want to claim that it is investment property in order to deduct an expected loss from selling it. Real estate taxes were deducted every year on their Schedule A, and they did not have a mortgage in regards to the property. Can this property be considered investment property in terms of selling it? What type of deduction, if any, can be claimed if there is, in fact, a loss on the sale of their second residence?
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Did the T/Ps ever live in that home? Did one of their parents? Their children? It's extremely unusual for someone to buy a second residence and then never use it or allow others to use it. If that's what they did, however, it would be categorized as "investment property." Investment property is a capital asset, and when sold gives rise to capital gain or loss.
If these were my clients, I would advise them to anticipate a possible challenge by the IRS. I'm not saying a challenge and disallowance is likely, but due to the unusual facts it probably has a greater chance of being questioned.Roland Slugg
"I do what I can." -
"Vacant for many years..." That indicates at one time someone lived there? If not, why did they buy it? Was it their intent to flip and it just didn't happen? Need to probe further.Comment
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The taxpayers had intended to make their second residence their principal place of residence, but it never happened due to unforeseen circumstances. No one has ever lived in their second home.Comment
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