Tax Insights

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The Importance of Adequate Tax Records

Failure to generate and keep adequate tax records to support a certain position can have costly results as detailed recently in Tax Court Memo 2015-95.

In this case, a husband and wife purchased an oceanfront condo as a seasonal home never intending it to be their primary residence. A few years later, an unfortunate family tragedy prompted them to no longer stay at the property. Rather than sell it, the family decided to rent it out because they were confident in the future appreciation of the property while generating some cash in the short term.

While the condo was listed for rent with the development’s real estate company (the area was still being developed), efforts to rent it were limited to showing the property as a model home and letting prospective clients know that it was available to rent. After failing to rent it, the condo was listed for sale with another broker until it sold. In the interim, the couple claimed various deductions related to the condo on Schedule E and took a loss for its sale. Not only were all these losses disallowed, but accuracy-related penalties applied as well.

The tax court held there was insufficient evidence to support the condo had been converted to a rental property. While the property was featured in a portfolio of rental properties in the realty company’s office, no evidence was provided to show efforts the realtor took to market the property outside of the development. Nor was the taxpayer even able to provide a copy of the agreement with the realty company that attempted to rent it out. And no evidence was presented that the second realty company attempted to rent it out. In the end, failure to provide such rudimentary evidence resulted in a costly result to the taxpayers.

By Dale F. Jensen, CPA