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Court Rules Double Tax Break Legal

June 01, 1986|JOHN BETZ WILLMANN | Special to The Times

WASHINGTON — Remember when houses were difficult to sell, and frustrated homeowners had to move on and rent the house that they had hoped to sell?

Those days are four or five years in the past, but the legal effects of that predicament recently have surfaced in the 9th Circuit Court of Appeals, which awarded a pair of tax breaks to a couple who needed them.

The problem--no surprise--was with the Internal Revenue Service.

The taxpayers were permitted to defer tax recognition on the sale of their house and also to take deductions for depreciation and expenses for the period their house was a rental property.

The couple had rented out their house during the time they were unable to sell it for what they thought it was worth. However, as reported in a quarterly newsletter published here by National Permanent Bank, the couple also claimed deductions for depreciation, along with the expenses for the rental.

Then the IRS took a stand, saying they couldn't do that.

IRS contended that if the taxpayers were entitled to defer recognition of any gain on the sale of their house, then they could not also take deductions for depreciation or rental expenses. IRS said that "a principal residence" and a "property used in trade or business or held for production of income" were mutually exclusive as a matter of law.

In other words, the couple could not claim both tax breaks. IRS was saying that the couple could not have their cake and eat it, too. And the Tax Court agreed when its opinion was sought on an appeal by the couple.

But the 9th Circuit Court of Appeals reversed that decision, contending that if the IRS wants such a rule, then it (IRS) should ask Congress to enact one.

The court noted that Congress could be presumed to be aware of a 1943 case in which it was held that property abandoned as a residence and listed for rent or sale qualifies as property held for production of income, with the right of deductions for rental expenses. Also, the court noted that legislative history has traditionally allowed non-recognition of gain, despite a property's temporary rental prior to sale.

Meanwhile, a Justice Department attorney told National Permanent Bank's newsletter that the department has not decided how this issue will be treated in the future.

SHORTLY: Mortgage applications and their processing are super-active markets again, now that President Reagan has signed emergency legislation to permit the Federal Housing Administration to provide more billions of credit insurance for home buyers. Also, the FHA operating authority has been extended through June 6. Before the Congress and President acted, the FHA and its mortgage insurance program were out of business for a few days. . . .

The Government National Mortgage Assn., which packages and sells certificates of participation in FHA and VA mortgages, also has had its credit limit increased by $60 billion, and that should take it through the end of this fiscal year (Sept. 30), even though the mortgage business is breaking records in many parts of the nation. . . .

The median cost of homes sold in this Washington area last year was about $105,000, according to the U.S. League of Savings Institutions, but it likely will be considerably more this year, according to veteran realtor Earl Farr, who said recently that prospective purchasers are so eager to buy that they seldom dicker any more on asking prices of resale houses.

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