So You Want To Convert That Second Home To A Rental

 

A recent decision of the Tax Court (in the Redisch case) reminds us of how a bloke has to act with respect to the “conversion” of that vacation home to a rental property, entitling the taxpayer to the potential tax benefits of that rental loss, and the possibility of even deducting a loss upon the eventual sale of the property.

The Court found the facts in this case fairly cut and dried, in concluding that these folks did not convert their Florida vacation home to property “held for the production of income”.  Their rental effort wasn’t serious and the property was actually never rented.  As a result, they couldn’t deduct their rental expenses or claim a loss on the sale.

Whether an individual has converted his personal realty to the status of property held for the production of income is a question of fact.  The Tax Court often looks to five factors to determine the taxpayer’s intent:

  • The length of time the house was occupied by the individual as his residence before placing it on the market for sale
  • Whether the individual permanently abandoned all further personal use of the house
  • The character of the property (recreational or otherwise)
  • Offers to rent
  • Offers to sell

No single factor is determinative, and all of the facts and circumstances are considered.

These folks bought their Florida oceanfront condo for $875,000 in 2004.  They used the property for personal purposes for several years, deciding to rent it in 2008,  After doing a little remodeling, they received inquiries from two potential renters, though neither came through.

Because of lackluster interest in renting the property, they changed rental agents.  In late 2010, they sold the property for $725,000, claiming the loss for tax purposes.

The Court agreed with IRS that the property was not converted to a rental to a sufficient degree.  Although Mr. Redisch testified that he signed a one-year agreement with the realtor to rent the property, he did not provide any other evidence of such an agreement.  Also, he testified that the efforts of the realtor to rent out the property were limited to featuring it in a portfolio kept in the company’s office and telling prospective buyers that it was available when showing it as a model.  The Court concluded that is was “unsurprising that this minimal effort yielded only minimal interest.”

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

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