By Joe Zitzka
Many people have vacation homes they’ve purchased over the years but don’t use often because life gets in the way. So what do you do when someone suggests converting that unused vacation home into a rental property that gives rise to deductions and might even result in a useable loss if you sell it for less than you paid for it when you bought at the height of the market? Well, according to the Tax Court, you take the rental process seriously.
Recently the Tax Court denied deductions and an ordinary loss on the sale of a rental property in Redish, TC Memo 2015-95. In doing so the court noted that the taxpayers did not take the rental efforts seriously and it was “unsurprising that [their] minimal effort yielded only minimal interest” in the rental of the property. Although the taxpayers listed the property with a broker and interested parties were informed that the property was available for rent, the property was never actually rented over a two year period prior to its sale.
The answer to the question of whether a taxpayer has converted personal property to property held for the production of income is a question of fact. When attempting to answer that question, the court generally looks to five factors to determine the taxpayer’s intent with respect to the property. These factors include the following:
1. The length of time the property was occupied by the taxpayer as his or her residence before placing in on the market for sale.
2. Whether the taxpayer permanently abandoned all further personal use of the property.
3. The character of the property (i.e., was it used for recreational purposes or otherwise).
4. Were there offers or efforts to rent the property?
5. Were there offers to sell the property?
Though no one factor is determinative, all are relevant. So, if you are considering converting a vacation property into a rental property, consider the above and take the process seriously.
