SCOTUS Reports

Tag: Bolaris v. Commissioner

  • Bolaris v. Commissioner, 87 T.C. 1039 (1986): Temporary Rental of Former Residence and Nonrecognition of Gain Under Section 1034

    Bolaris v. Commissioner, 87 T. C. 1039 (1986)

    A taxpayer can defer gain recognition under section 1034 despite temporarily renting their former residence if the rental is ancillary to sales efforts and not for profit.

    Summary

    In Bolaris v. Commissioner, the Tax Court addressed whether taxpayers could defer gain recognition on the sale of their former residence under section 1034 after temporarily renting it while attempting to sell. The court found that the temporary rental did not preclude section 1034’s application, as the primary motive was to sell, not profit from rent. However, the court denied deductions for depreciation and expenses under sections 162, 167, and 212, ruling that the rental was not engaged in for profit. This case illustrates the distinction between property held for personal use and for income production, impacting how taxpayers handle the transition from residence to rental property.

    Facts

    Stephen and Valerie Bolaris purchased a home in San Jose, California in 1975, using it as their principal residence until October 1977. In July 1977, they listed the property for sale and began constructing a new home. Unable to sell, they rented the old residence from October 1977 to May 1978, and again for a short period before its sale in August 1978. The Bolarises reported rental income and claimed deductions for expenses and depreciation. The Commissioner challenged these deductions, asserting the rental was not for profit, and questioned the applicability of section 1034 due to the rental period.

    Procedural History

    The Commissioner determined deficiencies in the Bolarises’ 1977 and 1978 federal income taxes and later asserted an increased deficiency for 1978. The case was assigned to Special Trial Judge Fred S. Gilbert, Jr. , who issued an opinion adopted by the full Tax Court. The court reviewed the case and held that the Bolarises qualified for section 1034 treatment but were not entitled to the claimed deductions.

    Issue(s)

    1. Whether the Bolarises are entitled to defer recognition of gain under section 1034 on the sale of their former residence despite temporarily renting it.
    2. Whether the Bolarises are entitled to deductions for depreciation and expenses under sections 162, 167, and 212 for the rental of their former residence.

    Holding

    1. Yes, because the temporary rental was ancillary to sales efforts and did not convert the property from personal use to income-producing use.
    2. No, because the rental was not undertaken with the objective of making a profit, thus not qualifying for deductions under sections 162, 167, and 212.

    Court’s Reasoning

    The court relied on Clapham v. Commissioner, which established that temporary rental of a former residence does not preclude section 1034’s application if the rental is necessitated by market conditions and ancillary to sales efforts. The Bolarises’ situation mirrored Clapham, as they rented due to a lack of offers and maintained efforts to sell. The court emphasized that the Bolarises’ primary motive was to sell, not to generate rental income, citing legislative history indicating temporary rentals do not necessarily disqualify section 1034 treatment. However, the court denied deductions under sections 162, 167, and 212, as the rental was not engaged in for profit. The court noted that while successful rental at fair market value typically suggests a profit motive, the Bolarises’ actions, including vacating the property to facilitate sales, showed their rental was not for profit. The court distinguished this from property held for investment, which would qualify for deductions.

    Practical Implications

    This decision clarifies that taxpayers can still defer gain under section 1034 even if they temporarily rent their former residence, provided the rental is ancillary to sales efforts. However, it also warns that such rentals will not qualify for deductions under sections 162, 167, and 212 if not undertaken with a profit motive. Practitioners advising clients on selling their homes should consider this when planning the transition period. The ruling impacts how taxpayers manage the financial aspects of selling a home, particularly in slow markets where temporary rental might be necessary. Subsequent cases, such as R. Joe Rogers v. Commissioner, have distinguished this ruling based on the taxpayer’s intent and actions regarding the property. This case remains relevant for understanding the interplay between personal use and income-producing use of property in tax law.

  • Bolaris v. Commissioner, 81 T.C. 840 (1983): Temporary Rental of Old Residence Does Not Preclude Nonrecognition of Gain but May Disallow Deductions

    Bolaris v. Commissioner of Internal Revenue, 81 T.C. 840 (1983)

    Temporary rental of a former residence, incident to its sale, does not automatically disqualify the sale from nonrecognition of gain under Section 1034 of the Internal Revenue Code, but deductions related to the rental period may be limited if the rental activity is not primarily engaged in for profit.

    Summary

    Stephen and Valerie Bolaris temporarily rented their former residence while trying to sell it after moving to a new home. They sought to defer capital gains taxes on the sale of the old residence under Section 1034 and deduct rental expenses and depreciation. The Tax Court held that the temporary rental did not disqualify them from deferring capital gains under Section 1034 because the rental was ancillary to the sale. However, the court disallowed deductions for rental expenses and depreciation exceeding rental income, finding that the rental activity was not engaged in for profit under Section 183, as their primary motive was to sell, not to generate rental income.

    Facts

    Petitioners, Stephen and Valerie Bolaris, purchased a home in San Jose, California, in 1975 and used it as their principal residence. In July 1977, they began constructing a new principal residence and listed their old residence for sale. When the old residence did not sell within 90 days, they rented it out on a month-to-month basis starting in October 1977 to cover expenses while continuing to seek a buyer. They moved into their new residence in October 1977 and never intended to return to the old one. They rented the old residence to two different tenants until May 1978 and then for a short period to the buyers before the final sale in August 1978. They reported rental income and claimed deductions for expenses and depreciation related to the rental activity.

    Procedural History

    The Commissioner of Internal Revenue disallowed deductions for depreciation, insurance, and miscellaneous expenses related to the rental of the old residence, arguing it was not property held for the production of income under Sections 167, 162, or 212, and was an activity not engaged in for profit under Section 183. The Commissioner initially challenged the application of Section 1034 but conceded on brief that it likely applied. The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    1. Whether the temporary rental of the petitioners’ former residence prior to its sale precludes the nonrecognition of gain under Section 1034 of the Internal Revenue Code.
    2. Whether the petitioners are entitled to deductions for depreciation, insurance, and miscellaneous expenses incurred in connection with renting their former residence while attempting to sell it under Sections 167, 162, or 212 of the Internal Revenue Code.

    Holding

    1. Yes. The temporary rental of the former residence does not preclude the nonrecognition of gain under Section 1034 because the rental was temporary and ancillary to the sale.
    2. No. The petitioners are not entitled to deduct depreciation, insurance, and miscellaneous expenses in excess of rental income because the rental activity was not primarily engaged in for profit under Section 183.

    Court’s Reasoning

    Section 1034 Issue: The court relied on Clapham v. Commissioner, which held that temporary rental of a former residence does not automatically disqualify it from Section 1034 treatment. The court found the Bolaris’ rental was temporary and due to the exigencies of the real estate market, ancillary to sales efforts, and arose from their use of the property as a principal residence. Quoting Clapham, the court emphasized, “In leasing the premises, petitioners’ dominant motive was to sell the property at the earliest possible date rather than to hold the property for the realization of rental income.” The legislative history of Section 1034 also supports that temporary rentals should not necessarily disqualify nonrecognition of gain.

    Deduction Issue: The court determined that to deduct expenses under Sections 162, 167, or 212, the rental activity must be undertaken with the primary intention of making a profit, citing Jasionowski v. Commissioner. The court agreed with the respondent that the same factors supporting Section 1034 application—temporary rental, ancillary to sale—demonstrated a lack of profit motive. The court stated, “The very nature of petitioners’ rental activity — i.e., temporary, ancillary to sales efforts, renting on a monthly basis, requesting that the first tenant vacate to facilitate sales efforts — demonstrates that it was not engaged in for the objective of making a profit.” Section 183, regarding activities not engaged in for profit, limits deductions to the extent of income from the activity, after deductions allowed regardless of profit motive (like interest and taxes). Since the Bolari’s interest and taxes exceeded rental income, no further deductions were allowed.

    Practical Implications

    Bolaris clarifies that homeowners can temporarily rent their old residence while trying to sell it and still qualify for nonrecognition of capital gains under Section 1034. However, it also establishes a crucial distinction: while temporary rental may not negate Section 1034, it may still be considered an activity not engaged in for profit under Section 183, limiting deductible rental expenses. Attorneys advising clients in similar situations should emphasize the importance of demonstrating that the rental activity, even if temporary, is structured and intended to generate profit to maximize deductible expenses. Taxpayers should be prepared to show efforts to achieve profitability in their rental activities if they wish to deduct losses beyond the limitations of Section 183, despite the temporary nature of the rental incident to a sale.