1. (Loss allowed.) In 1973, Clancy purchased a house and land in a coastal resort area of California. Prior to the purchase, Clancy was told by a renting agent that he could expect reasonable income and considerable appreciation from the property. Previously, he had sold similar property in the same development at a profit. After the purchase, Clancy spent $5,000 to prepare the house for rental, and gave a rental agency the exclusive right to offer the property for rent. The house was available for rent 95% of the time in 1973, and 100% of the time in 1974. However, rentals proved disappointing, totaling only $280 in 1973 and $1,244 in 1974, despite the active efforts of the agency to rent the property. However, the house did appreciate in value and was eventually sold at a profit of $14,000. In 1973 and 1974, Clancy deducted rental expenses of approximately $21,000, which the IRS disallowed. The IRS claimed that the house was not rental property used in a business. Furthermore, as Clancy knew that he could not make a profit from the rentals, he could not be considered to hold the property for the production of income.

2. (Loss allowed.) Nelson bought a condominium, hired a rental agent, and even advertised in the Wall Street Journal and Indianapolis Star. He also listed the unit for sale. During 1974, he was unable to rent the apartment but deducted expenses and depreciation of over $6,100, which the IRS disallowed. The IRS argued that he did not buy the unit to make a profit but to shelter substantial income from tax. The Tax Court disagreed. Although his efforts to rent were not successful in 1974, he was successful in later years in renting the unit. He rarely visited the apartment other than to initially furnish it. When he went on vacation, he went abroad or to other vacation spots.

3. (Loss disallowed.) The Lindows purchased a condominium that they rented out during the prime winter rental season. However, over an eight-year period their expenses consistently exceeded rental income. The Tax Court agreed with the IRS that expenses in excess of rental income were not deductible. Substantial, repeated losses, even after the initial years of operation, indicated that the operation was not primarily profit-oriented. The rental return during the prime rental season could not return a profit. Even if the condominium were fully rented for the entire prime rental season, annual claimed expenses would exceed rent income. The couple also used the unit for several months and intended to live there on retirement. They did not consider putting the unit up for sale with an agent. Finally, that they had detailed records of income and expenses did not prove a business venture. Records, regardless of how detailed, are insufficient to permit the deduction of what are essentially personal expenses.

1. The IRS and Tax Court disallowed a loss deduction for rental expenses under the “profit-motive rules” (40.10) where a principal residence was rented for 10 months until it could be sold. According to the Tax Court, the temporary rental did not convert the residence to rental property. Since the sales effort was primary, there was no profit motive for the rental. Thus, no loss could be claimed; rental expenses were deductible only to the extent of rental income. The favorable side of the Tax Court position: Since the residence was not converted to rental property, the owners could under prior law rules defer tax on the gain from the sale by buying a new home. An appeals court reversed the Tax Court and allowed both tax deferral and a loss deduction. The rental loss was allowed since the old home was actually rented for a fair rental price. Furthermore, the owners had moved and could not return to the old home, which was rented almost continuously until sold.

2. In 1976, a couple bought a condo apartment in Pompano Beach, Florida. In 1983, they decided to move and listed the unit for either sale or rent with a local real estate broker. Sale of the unit was difficult because of the saturation of the Florida real estate market. Rental of the unit was also difficult because the condominium association’s rules barred the rental of condominium units on a seasonal basis. The unit remained unrented until it was sold in 1986 for a substantial gain. In 1984, the couple deducted a $9,576 rental loss ($7,596 for maintenance expenses and $1,980 for depreciation). The IRS disallowed the deduction as not incurred in a bona fide rental activity. The Tax Court allowed the deduction. The couple made an honest and reasonable effort to rent the condominium. Lack of rental income was caused by a slack rental market and the condominium association rules prohibiting short-term rentals.