SIGN OF THE TIMES

Eddie Quigg

A recent Tax Court case could be a poster child for a sign of these tough economic times. Essentially the facts involved a couple that sold their apartment house and bought a single family residence they intended to rent out. They continued to own and live in a separate residence. On their tax return they reported the sale of the apartment house and the purchase of the single family residence as a transaction that qualified as a section 1031 exchange, deferring the gain on the sale of the apartment house, claiming that the apartment house and the rental residence were qualifying like-kind properties.
The problem arose when they were unable to rent the residence despite documented attempts to do so, and eight months later, due to economic exigencies, they sold their primary residence and moved into the rental residence. The IRS nixed the deferral of gain on the apartment house, claiming that the unrented residence was not qualifying property due to its ultimate use as the taxpayer's personal residence.
Luckily for the taxpayers, the Tax Court sided with them, holding that the couple's efforts to rent the property, and its conversion to personal use only as a last resort, did not disqualify the residence as like-kind property. Of course the payment of legal fees to defend their position probably lessened the taxpayer's joy of their victory over the IRS.