Mansion Property Was Never Actually Used in a Rental Activity, Loss Was Capital

The question of whether real estate was or was not a capital asset in the hands of the taxpayer became an issue in the case of Keefe v. Commissioner, TC Memo 2018-28.  While the issue can arise with other assets, real estate investments are generally large enough that the question of whether a gain or loss on sale is capital, §1231 or ordinary is often a very significant issue, with high stakes involved.

In this case, the taxpayer was looking at a seven-figure loss on the sale of a historic waterfront mansion they had acquired to restore and attempt to rent in Newport, Rhode Island.  The restoration ended up taking much longer than anticipated and was far costlier.  Although they talked with a real estate agent about renting out the property to wealthy individuals who were expected to pay $75,000 a month for the property during peak season, it was never actually rented out.

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Income Received from Forfeiture of Deposits on the Sale of a §1231 Asset Does Not Represent Capital Gains Under §1234A

The taxpayer in CRI-Leslie LLC et al. v. Commissioner, 147 T.C. No. 8 reported the forfeiture of $9.7 million deposits it retained when a buyer failed to close on the sale of a hotel property of the taxpayer as a capital gain.  The taxpayer argued that this treatment was the one provided for payments received for contract terminations of this sort by IRC §1234A.

Many CPAs may not immediately recognize that particular reference in the Internal Revenue Code, though some readers may recognize that section as the one that created a bit of stir when the Tax Court turned to in its later reversed opinion in the case of Pilgrim’s Pride Corporation v. Commissioner (141 TC No. 17, reversed, CA 5, 115 AFTR 2d ¶ 2015-477).

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