(a) Losses not allowed. A loss sustained on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible under section 165(a).
(b) Property converted from personal use. (1) If property purchased or constructed by the taxpayer for use as his personal residence is, prior to its sale, rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss sustained on the sale of the property shall be allowed as a deduction under section 165(a).
(2) The loss allowed under this paragraph upon the sale of the property shall be the excess of the adjusted basis prescribed in § 1.1011-1 for determining loss over the amount realized from the sale. For this purpose, the adjusted basis for determining loss shall be the lesser of either of the following amounts, adjusted as prescribed in § 1.1011-1 for the period subsequent to the conversion of the property to income-producing purposes:
(i) The fair market value of the property at the time of conversion, or
(ii) The adjusted basis for loss, at the time of conversion, determined under § 1.1011-1 but without reference to the fair market value.
(3) For rules relating to casualty losses of property converted from personal use, see paragraph (a)(5) of § 1.165-7. To determine the basis for depreciation in the case of such property, see § 1.167(g)-1. For limitations on the loss from the sale of a capital asset, see paragraph (c)(3) of § 1.165-1.
(c) Examples. The application of paragraph (b) of this section may be illustrated by the following examples:
Example 1.Residential property is purchased by the taxpayer in 1943 for use as his personal residence at a cost of $25,000, of which $15,000 is allocable to the building. The taxpayer uses the property as his personal residence until January 1, 1952, at which time its fair market value is $22,000, of which $12,000 is allocable to the building. The taxpayer rents the property from January 1, 1952, until January 1, 1955, at which time it is sold for $16,000. On January 1, 1952, the building has an estimated useful life of 20 years. It is assumed that the building has no estimated salvage value and that there are no adjustments in respect of basis other than depreciation, which is computed on the straight-line method. The loss to be taken into account for purposes of section 165(a) for the taxable year 1955 is $4,200, computed as follows:
| Basis of property at time of conversion for purposes of this section (that is, the lesser of $25,000 cost or $22,000 fair market value) | $22,000 |
| Less: Depreciation allowable from January 1, 1952, to January 1, 1955 (3 years at 5 percent based on $12,000, the value of the building at time of conversion, as prescribed by § 1.167(g)-1) | 1,800 |
| |
| Adjusted basis prescribed in § 1.1011-1 for determining loss on sale of the property | 20,200 |
| Less: Amount realized on sale | 16,000 |
| |
| Loss to be taken into account for purposes of section 165(a) | 4,200 |
| Basis of property at time of conversion for purposes of this section (that is, the lesser of $23,000 cost or $20,000 fair market value) | $20,000 |
| Less: Depreciation allowable from January 1, 1953, to January 1, 1957 (4 years at 5 percent based on $10,000, the cost of the building, as prescribed by § 1.167(g)-1 | 2,000 |
| |
| Adjusted basis prescribed in § 1.1011-1 for determining loss on sale of the property | $18,000 |
| Less: Amount realized on sale | 17,000 |
| |
| Loss to be taken into account for purposes of section 165(a) | 1,000 |
Notes of Decisions
Jefferson v. Comm'r, 50 T.C. 963 (Tax Ct. 1968).
· cites it 4× “It is obvious that he need not have purchased the house to provide a rent-free place for his mother to live since she already was its sole owner.”
Melone v. Comm'r, 45 T.C. 501 (Tax Ct. 1966).
· cites it 6× “ed in any transaction entered into for profit, though not connected with a trade or business; * * * As regards a loss incurred on the sale of residential property, it has long been a settled principle that a loss incurred by a taxpayer from sale of his or her personal residence…”
McBride v. Comm'r (A), 50 T.C. 1 (Tax Ct. 1968).
· cites it 4× “When petitioner completed and moved into his new home in July 1961, he effectively terminated use of the Broadway building as a residence for himself and his family.”
Austin v. Comm'r, 35 T.C. 221 (Tax Ct. 1960).
· cites it 2× “In the case of an individual, the deduction for losses granted by section 165(a) shall, subject to the provisions of section 165(c) and paragraph (a) of this section, be limited to -- (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into…”
Adams v. Comm'r, 69 T.C.M. 2297 (Tax Ct. 1995).
· cites it 6× “, provides that if property purchased or constructed by the taxpayer for use as his or her personal residence is, prior to its sale, rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss sustained on the…”
Leavell v. Comm'r, 1996 T.C. Memo. 117 (Tax Ct. 1996).
· cites it 2× “At trial, Daniel acknowledged that he, Eva, and other family members had often made personal use of this residence. On petitioners' 1985 and 1986 joint Federal income tax returns, no rental income was reported by petitioners relating to the rental of this residence.”
Lull v. Comm'r, 51 T.C. 841 (Tax Ct. 1969).
· cites it 2× “We conclude that the amounts received by petitioners pursuant to the home guaranty policy are taxable as compensation.”
Murphy v. Comm'r, 66 T.C.M. 32 (Tax Ct. 1993).
· cites it 4× “212-1, Income Tax Regs. 6 *302 It is clear from the record that petitioners used their home in Minnesota as their personal residence.”
Patrick Guffey & Betty Guffey v. United States, 339 F.2d 759 (9th Cir. 1964).
“The taxpayers contend that the contract of sale was itself a transaction entered into for profit and itself constituted an appropriation of the property to income-producing purposes.”
Taylor v. Comm'r, 1998 T.C. Memo. 351 (Tax Ct. 1998).
· cites it 2× “3 OPINION PROFIT MOTIVE Respondent's determination in the notice of deficiency essentially embodies *363 the notion that the loss from the sale of a personal residence is nondeductible, a principle which is indisputable. See sec. 1.165-9(a), Income Tax Regs.”
Meersman v. Comm'r, 65 T.C.M. 1878 (Tax Ct. 1993).
· cites it 2× “Respondent determined that petitioner was not entitled to claim a deduction for a capital loss on the sale of his personal residence in Savannah, Georgia.”
Christensen v. Comm'r, 47 T.C.M. 1558 (Tax Ct. 1984).
· cites it 2× “We note that, even if petitioners had converted the house to business use, their basis for determining their loss on foreclosure would be the lower of their adjusted basis or the property's fair market value at the time of conversion. Sec. 1.165-9(b)(2), Income Tax Regs.”
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