## Facts

- Robert I. Redisch and Pamela A. Redisch owned an oceanfront condominium in Florida (the Porto Mar property) purchased in 2004 for $875,000.
- The condominium was used as a seasonal vacation home and was never the taxpayers’ primary residence.
- After their daughter died in 2006, the taxpayers largely stopped using the property but did not immediately sell it.
- In 2008, they removed most personal items and engaged a real estate company to rent the furnished unit; the unit was also shown to prospective buyers and sometimes used as a “model” unit.
- Rental activity was minimal: there were two inquiries, neither resulted in a lease, and the property produced no rental income.
- In 2009, the taxpayers listed the property with another realtor for rental or sale; they repeatedly reduced the asking price as the market declined.
- The taxpayers sold the property in 2010 for $725,000, less than their purchase price.
- On their 2009 and 2010 joint returns, they reported the property on Schedule E, claimed rental-related deductions and losses, and claimed an ordinary loss on the 2010 sale.
- The IRS issued a notice of deficiency for 2009 and 2010, disallowing the deductions and loss and asserting accuracy-related penalties under I.R.C. § 6662(a).

## Issues

1. Whether the condominium was converted from personal use to property held for the production of income, allowing deductions under I.R.C. §§ 212 and 165.
2. Whether the taxpayers were liable for accuracy-related penalties under I.R.C. § 6662(a) for negligence or substantial understatement.

## Decision

- The Tax Court held the condominium was not converted to property held for the production of income.
- The court disallowed the claimed Schedule E deductions and treated the loss on sale as a nondeductible personal loss.
- The court sustained accuracy-related penalties under § 6662(a) for both years.

## Legal Principles

- Expenses are deductible under I.R.C. § 212 only if the property is held for the production of income; losses under § 165(c)(2) require a transaction entered into for profit.
- Conversion of a former personal or vacation residence to income-producing property depends on objective facts showing abandonment of personal use and a genuine, sustained commitment to an income-producing purpose.
- Minimal or sporadic rental efforts (e.g., a listing, limited inquiries, no executed lease, no tenants, and simultaneous emphasis on sale) can be insufficient to establish conversion.
- The § 6662(a) penalty applies to underpayments attributable to negligence or substantial understatement, absent reasonable cause and good faith under § 6664(c), including competent and substantiated reliance on professional advice.

## Conclusion

The Tax Court found that the taxpayers’ limited and unsuccessful rental efforts did not convert their former vacation condominium into income-producing property, so rental deductions and a loss on sale were disallowed, and accuracy-related penalties were upheld for failure to show reasonable cause or good-faith reporting.


Redisch v. Commissioner, T.C. Memo. 2015-95 (2015)