Income Tax–Listing Abandoned Residence for Sale and Not for Rent Considered Sufficient To Convert to “Property Held for the Production of Income”–Hulet P. Smith

Since 1941, Hulet Smith and his wife had lived in a large house in Arcadia, California, where Smith had been actively engaged in a real estate loan business. In 1959, Smith decided to retire and move to Pebble Beach, a distance of about 400 miles from Arcadia. He purchased a parcel of land in Pebble Beach and built a large expensive home, with the avowed intention of making this his permanent personal residence. In 1961, after severing all business and social connections in the vicinity of their old residence, Smith and his wife moved into their new home, taking virtually all of their furnishings with them. At the same time Smith placed the Arcadia residence on the market for sale, having decided not to offer it for rent, because the rental income would have been insufficient to justify retention of the property, and because rental would have obstructed sale. Smith and his wife filed joint returns for the years 1962 and 1963, claiming as deductions depreciation and expenditures for maintenance and repair of the Arcadia property. The Commissioner of Internal Revenue disallowed these deductions and ordered a deficiency assessment. The Tax Court, acting on the petition of Smith, held, in a memorandum opinion, that throughout 1962 and 1963 the Arcadia property was “held for the production of income” under sections 167(a)(2) and 212(2) of the 1954 Internal Revenue Code (Code), and thus that petitioner was entitled to deduct depreciation and maintenance expenditures in both years. If a former residence is permanently abandoned and placed on the market for sale only, such property may be sufficiently converted to “property held for the production of income” to qualify for depreciation and maintenance expense deductions arising after such conversion.