## Facts

- Taxpayers (husband and wife) bought a home in Bellevue, Washington in 1958 and used it as their personal residence until June 1964.
- In 1964, the husband’s employer transferred him to Illinois; the taxpayers moved and stopped occupying the Bellevue property.
- The taxpayers hired brokers to sell the Bellevue property (March 1964) and later to rent and sell it (July 1964).
- The property was continuously listed for sale or rent until it was sold in October 1966.
- Two rental offers were received; the taxpayers rejected the first as too low, and the second was withdrawn by the prospective tenant.
- The property was never rented before sale.
- The taxpayers’ basis was $34,745; the property was ultimately sold for $26,000.
- On their 1966 return, the taxpayers claimed a deduction for the loss on sale as a loss from a transaction entered into for profit under I.R.C. § 165(c)(2).
- In 1966, the taxpayers’ baggage was stolen; the parties agreed the amount of the loss was $355 and that by year-end there was no reasonable prospect of recovery.

## Issues

1. Whether the loss on the sale of the taxpayers’ former personal residence was deductible under I.R.C. § 165(c)(2) as a loss incurred in a transaction entered into for profit.
2. Whether the taxpayers were entitled to a 1966 casualty/theft loss deduction of $355 for stolen baggage.

## Decision

- The Tax Court denied the § 165(c)(2) loss deduction for the sale of the former residence.
- The court held that listing the house for sale or rent and receiving unconsummated rental offers did not convert the property from personal-use to income-producing property for purposes of deducting a loss on sale.
- The court allowed the $355 theft loss deduction for the stolen baggage, consistent with the parties’ concessions and the lack of a reasonable prospect of recovery in 1966.
- Decision entered reflecting allowance of the theft loss and disallowance of the residence-sale loss.

## Legal Principles

- A loss on the sale of a personal residence is generally a nondeductible personal loss.
- Under I.R.C. § 165(c)(2), an individual may deduct a loss only if it is incurred in a transaction entered into for profit.
- Treas. Reg. § 1.165-9 requires a former residence to be converted to income-producing purposes—such as by rental or other clear appropriation to producing income—before a loss on sale may qualify under § 165(c)(2).
- Mere efforts to sell or rent, without actual rental or comparable objective conversion, do not establish the required profit-transaction character for a loss on sale.

## Conclusion

The Tax Court held that the taxpayers could not deduct a loss on the sale of their former residence because the property was never rented or otherwise clearly converted to income-producing use, but it allowed the stipulated $355 theft loss for stolen baggage in 1966.


Cowles v. Commissioner, T.C. Memo 1970-198 (1970)