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OPINION
We address only respondent’s alternative ground for
disallowing petitioners’ claimed capital loss carryover
deductions for 1998 and 1999.3
Under section 165(c)(2) an individual taxpayer is allowed a
loss deduction where a loss is incurred in a transaction entered
into for profit. The purchase of a personal residence generally
is not considered a transaction entered into for profit.
The regulations under section 165 provide: “A loss
sustained on the sale of residential property purchased or
constructed by the taxpayer for use as his personal residence and
so used by him up to the time of the sale is not deductible under
section 165(a).” Sec. 1.165-9(a), Income Tax Regs.
The regulations also provide that in order to be allowed a
loss on the sale of property, which at an earlier time was used
as a personal residence, a taxpayer must show that the taxpayer’s
purpose for owning the residence changed and that the new purpose
was for the production of income.
If property purchased or constructed by the taxpayer for use
as his personal residence is, prior to its sale, rented or
otherwise appropriated to income-producing purposes and is
used for such purposes up to the time of its sale, a loss
sustained on the sale of the property shall be allowed as a
deduction under section 165(a). [Sec. 1.165-9(b)(1), Income
Tax Regs.]
3 Petitioners do not assert that the burden of proof in this
case should shift to respondent under sec. 7491.
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Last modified: May 25, 2011