Loss on Sale of Non-primary House

[Lion EA]

OK, I'm fuzzy. Client owns condo, not his primary residence. Inherited from his father. Spent lots of money after water damage from burst pipes while vacant resulted in mold. If he now sells it for less than his adjusted basis as inherited and then renovated, can he take the loss for tax purposes. Not rented out. May have lived in it while overseeing renovations as it's out-of-state. So, is this investment property and a loss available for tax purposes? Or, is it a second home and no loss? What do I need to ask him? Is he wintering there or just checking on his investment?

[Lion EA]

Bump!

[kcjenkins]

I'd say the answer depends on those things you threw up. IF it is investment property, then yes, he could take the loss. If it was used as personal, [just being there to work on it is not personal use] then you have to look at the percentages to determine if it could be mixed-use property. Usually, in a situation such as you describe, it would be treated as investment property, but it does depend on use pattern.

[Lion EA]

He emailed me again today. He inherited from father a few years back. While vacant, it had the water/mold damage and was gutted to the studs and rebuilt two years ago. They have spent the last couple of winters on and off there. It has never been rented. Sounds like what began as investment property has become personal use. So no loss. They were going to wait for the market to rise before selling it. But, the whole development suffered new water damage that hurt my client's condo. Developer's insurance will repair it, but my client is getting tired of repairs in another state and is thinking about putting it on the market after repaired.

[michaelmars]

OK, I'm fuzzy. Client owns condo, not his primary residence. Inherited from his father. Spent lots of money after water damage from burst pipes while vacant resulted in mold. If he now sells it for less than his adjusted basis as inherited and then renovated, can he take the loss for tax purposes. Not rented out. May have lived in it while overseeing renovations as it's out-of-state. So, is this investment property and a loss available for tax purposes? Or, is it a second home and no loss? What do I need to ask him? Is he wintering there or just checking on his investment?

THE HOUSE IS CONSIDERED INVESTMENT PROPERTY since an inherited house is a capital asset so the loss is deductible unless the beneficary used it as a personal residence.

"Sale of decedent's residence. If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent's personal residence and even if you did not rent it out. If, however, the house is not held for business or investment use (for example, if you intend to permit a beneficiary to live in the residence rent-free and then distribute it to the beneficiary to live in), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss is not deductible."

pub 529

[mcb39]

I agree with michaelmars. The key word here is inherited, the second key is no personal use. It is inherited property which is long term and fix-up expenses plus basis results in a capital loss.

[Lion EA]

But, according to my last communication from this client, what sat vacant after inheriting has had some personal use over the last two or more winters, and not just during the renovations. I think it's a home, not their primary residence, and no loss allowed. I'll question him more re timing. Just spent a day there to make sure pipes were OK or vacationed for a couple of weeks, that kind of thing.

[mcb39]

But, according to my last communication from this client, what sat vacant after inheriting has had some personal use over the last two or more winters, and not just during the renovations. I think it's a home, not their primary residence, and no loss allowed. I'll question him more re timing. Just spent a day there to make sure pipes were OK or vacationed for a couple of weeks, that kind of thing.

Isn't there something about 14 days or less. You are correct to nail him down as to details. I think he should document and sign.

[Lion EA]

This one doesn't try to push the envelope. And, his wife is a stickler for documentation. They're just asking questions now that they're thinking about selling. I think the 14 days has to do with rental, and this definitely was not a rental. Just need to ask him if they're using the condo when in FL or staying elsewhere (think wife had a home there, too, so a possibility). Both had parents pass away during the last few years that I've been preparing their returns.

[kcjenkins]

Sounds like by using it personally, they converted it into a 'second residence' so no loss. UNLESS they try to rent it out for a while now, converting it into business property. I'd be inclined to go that way if the loss is substantial, but if they can get most of it out by selling, might not be worth the trouble of renting. As this is a condo, might look into whether the condo assoc has a rental program they could put it into, as that would make it business property with the least amount of personal effort from them.

[Lion EA]

Good idea about a built-in rental program through their condo association. Might take some of the scariness out of being an absentee landlord.

[kcjenkins]

Yes, it basically takes almost all the problems out. The program does the advertising, rents the condo, collects the payment, and sends them a monthly accounting and payment of the income less expenses. If it's in FL, might be a viable alternative. It's at least worth a phone call to find out their options.

[Lion EA]

Client was in today picking up returns, so got to talk to him face-to-face.

Inherited condo from an uncle in 1989. Client never lived there. However, he allowed his father to live there for some years prior to his death in 2004; father paid condo fee and utilities. Never an attempt to make it a FMV rental. So, now we have personal use, right?

From 2004, the condo has been vacant. Major water damage and resulting renovation. And, now another broken pipe creating more repairs. So, client or his wife have been there from time to time to pick out materials, oversee renovations, etc., but never for more than a week at a time. Is there such a thing as converting a personal use home to an investment property, or only the other way around?

Turning it into a rental is now out of the question. They do not want to be absentee landlords. The condo is managed by a board of directors of owners, and not a professional management company. It's a huge complex. My clients have heard horror stories of tenants trashing units, leaving water running when moving out, fighting evictions, etc. They've had so many repair problems with it empty, that they do not want to add the wear and tear of strangers.

They recently put up their daughter, son-in-law, and grandchildren in a hotel so as not to have people (yes, their own daughter) in their condo when they won't be back to check on it for some time.

Just wondering if something that was personal use no more recently than 2004 could ever turn into investment property in the owner's hands.

[kcjenkins]

Seems like that is what it now is, so yes, I'd consider it investment property now. Expenses to maintain it would be added to basis. Of course if they start using it personally, it could change back in a hurry. But minimal visits to inspect and manage repairs would not be personal use.