Dear,

My wife and I bought a house in Floria early last year 2006 as an investment home and planed to make it as rental property and later will make it as our retirement home BUT: After rented it out to a friend family for 1 month, we realized that we will have a big negative CASH FLOW. In addition, the real estate market started to show some sign of a correction, we had decided to list it for sale and until now STILL NOT get it SOLD.

It's time for filing tax and we have these questions:

1. Can we claim it as rental property if we only rented it for 1 month and the other 9 months are vacant? We have paid for maintenant and PG&E, mortgage and property tax. We traveled 3 times for acquiring this property and paid quiet a few of money and wonder if we can claim all of those costs as a Capital Loss???

2. AND if we claim it as a second home for 2006 and when we will sell it in 2007, can we claim it as investment property with a BIG LOSS?

Thanks very much,
We are looking forward to your answer.

Tony

Tony,

It seems here that the intent was to have the second property as a rental property. In fact, it appears that you actually rented it out for a month or so. The facts initially would conclude that you would qualify to file a Schedule E showing rental income and expenses such as mortgage interest, property taxes, repair and maintenance expenses to offset the rental income.

Now, it appears that you stopped renting the property either because you could not find a tenant due to poor market conditions. You should have made every attempt to rent the property through advertising. This would actually prove the intent was there to make an effort to rent this property for the period it was vacant. Clearly, the IRS would want to consider this property as a 2nd home so that you would not be able to deduct the Repair and Maintenance expenses, along with the Utility expenses. So, if you can prove that you were actively attempting to continue renting this property than you would have a strong case to file a Schedule E.

This distinction is very important, because if you are able to meet requirements to file a Schedule E, you may be able to deduct more expenses and generate more losses. Whereas if the IRS position is taken, you can only deduct the Interest on loan for the 2nd home along with the property taxes on Schedule A. The Repair expenses would be used to increase your tax basis on the property and either help increase your losses or reduce profits on sale of your property.

You cannot claim a capital loss for expenses incurred on the property acquisition, unfortunately these are personal expenses. However, subsequent to converting this property into a rental property, any trips to visit the property to Florida would be deductible as a travel expense (if you file a Schedule E, that is assuming you meet the requirements as shown above).

In the event of the sale, the loss on sale of the property would appear to be a short term capital loss, that would be deducted at a rate of $3,000 per year or offset against other capital gains.

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