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satisfied by the record that petitioners effectively converted
the Stewart property into rental property when it was leased in
July 1995, even though the lessee ultimately purchased it in
December 1996. See Higgins v. Commissioner, supra (residence
effectively converted to rental property when it was leased to a
third party with the option to purchase); Rechnitzer v.
Commissioner, T.C. Memo. 1967-55 (residence was effectively
converted to rental property under bona fide lease where the
lessee subsequently purchased the property).
The next inquiry is whether petitioners sustained a loss on
the sale of the Stewart property. Petitioners contend that the
FMV at the time of conversion was $480,000, whereas respondent
contends that the FMV was $435,000. Because both of these
figures are lower than petitioners’ adjusted basis of $548,951,4
the determinative issue is what was the FMV of the Stewart
property as of July 1995.
Petitioners argue that the final sales price of $435,000 in
December 1996 is not an accurate reflection of the FMV of the
Stewart property in July 1995 because the sales price was the
result of a distressed sale where petitioners were compelled to
sell quickly at a price far below its true FMV of $480,000.
Given the record before us, we disagree.
4 Calculated as: Cost basis plus improvements less
depreciation ($484,950 + 70,000 - 5,999).
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