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credited to petitioners from the date of the agreement until
the end of the lease. The Sopers' mortgage payments were not
applied to the purchase price when they bought the Blue Lake
property.
3. Passage of Title to the Blue Lake Property
For financial reasons, the Sopers could not complete the
purchase of the Blue Lake property until August 5, 1991. On
August 5, 1991, Eureka Title Co. closed the escrow of the Blue
Lake property. Around that time, the Sopers paid $1,900 for a
new roof and $2,404 for pest and damage repairs.
Petitioners had about $30,000 equity in the Blue Lake
property when they sold it.
D. Petitioners' Tax Returns
Petitioners' accountant told them they should report the
mortgage payments made by the Sopers as rental income and deduct
the payment of property taxes and liability insurance as rental
expenses. Petitioners reported rental income from the Blue Lake
property on their 1989, 1990, and 1991 income tax returns.
Discussion
The issue for decision is whether the gain realized by
petitioners in 1989 from the sale of the Blue Lake property
qualifies for nonrecognition under section 1034. Generally, a
taxpayer must recognize gain on the sale of a personal residence.
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