I n general, don't expect Uncle Sam to pick up any of the tab - sale of a personal residence (or any personal asset, for that matter) at a loss generally doesn't qualify for a tax deduction.

So, "What's a mother to do?" you ask, in this day of difficult real estate markets.

One answer just might be to consider first converting that old house to a rental property before you actually sell it. Sale (at a loss) of realty which had first been converted into business or income-producing property generally will qualify for some tax relief.

But this strategy is sometimes "easier said than done," considering the Revenooers will probably look askance on any loss they see arising from the sale of what once was the taxpayer's own house.

Whether the loss will fly will be based on - you guessed it - all of the "facts and circumstances" surrounding the transaction.

Some of them might be:

1. The length of time the house was occupied by the taxpayer as his residence before putting it on the market;

2. Whether the taxpayer permanently abandoned all use of the house for personal purposes;

3. The record of offers solicited and/or received to rent the property;

4. Any record of offers to sell the property.

While the record is replete with court decisions favoring a taxpayer's ability to deduct a loss on the sale of such a rental, some taxpayers have likewise lost the debate. Some courts have held that an unsuccessful attempt to rent one's house isn't "enough." Nor does no longer using a house as a residence, and merely listing it with a broker constitute activity sufficient to constitute "conversion" from personal to business use.

The case law, in general, does point to a few basic principles which taxpayers should consider to help them "bulletproof" the assertion that they truly did "convert" their former residence to a rental.

1. Discontinue all personal use of the house.

2. Keep good records of the rental activity, including the effort to commence that activity, as one would do in any business situation.

3. List the property with a real estate professional, and commence advertising of the rental.

4. Avoid rental tenancy with related parties.

5. Report on your tax return the rental income, in the appropriate manner, claiming all appropriate rental deductions.

And remember - any loss you eventually claim upon the eventual sale must be computed in accordance with a special rule - the tax basis used in the loss calculation may not be your original cost, but instead would be the fair market value of the property at the date of conversion to a rental, if less.



CONSULT YOUR TAX ADVISER - This article contains general information about various tax matters.

You should consult your CPA regarding the implications to your own particular situation.



Jeff Quinn is a shareholder in Ashley Quinn, CPAs and Consultants, with offices in Incline Village and Reno.

He is also a contributor to the recently published Tax Savvy for Small Business, published by Nolo.

Quinn may be reached at (775) 831-7288 and welcomes comments at jquinn@ashleyquinncpas.com.