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142(a);3 Welch v. Helvering, 290 U.S. 111, 115 (1933).
Section 165(a) allows as a deduction any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. As relevant to the present case, section 165(c)
limits the deduction for an individual taxpayer to losses either
incurred in a trade or business, or in any transaction entered
into for profit. It is a long-settled principle that a loss
incurred by a taxpayer from the sale of his or her personal
residence is not deductible except where prior to the sale the
taxpayer abandons the use of the property as his or her personal
residence and converts it to a profit inspired use. Melone v.
Commissioner, 45 T.C. 501, 505 (1966); Leslie v. Commissioner, 6
T.C. 488, 493 (1946); sec. 1.165-9(a) and (b)(1), Income Tax
Regs.; see Heiner v. Tindle, 276 U.S. 582, 584-585 (1928).
The loss allowed upon the sale of residential property
converted to rental property is the excess of the adjusted basis
(as prescribed in section 1.1011-1, Income Tax Regs.) over the
amount realized from the sale. Sec. 1.165-9(b)(2), Income Tax
Regs. As relevant to this case, the adjusted basis is the lesser
of the following amounts at the time of conversion, reduced for
3 Sec. 7491 provides that, under certain circumstances, the
burden of proof is on the Secretary in court proceedings arising
in connection with examinations commencing after July 22, 1998.
Accordingly, sec. 7491 is inapplicable in the present case
because respondent commenced petitioners’ examination before July
22, 1998.
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