sale of vacant land

Strictly based on the facts in your post (that this was land purchased for a personal residence) then the loss would not be deductible. A different answer may be appropriate if it was investment property and treated as such.

I know your answer is correct.

But for the sake of arguement exactly how is the IRS going to know the taxpayer purpose in buying raw land?

...

By reading this newsgroup?

Which can be found with a google search.

But while OP said the land was to build a house for residential purposes, it didn't specify that it was to be the residence of the owner, as opposed to being rented out as a residence for someone else.

I have a recollection of a two year rule - that if the property was purchased more than two years ago but was not used for the owner's personal use, it can be treated as investment property. Is that correct?

Stu

You may be thinking of a different two year rule. It relates to deducting interest as personal mortgage interest on construction. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.

I have a client who has a house in another state. She has used it personally in the past, but it's been vacant for the last two years. Her accountant told me that, because it has been vacant, she can treat it as investment property, and do a 1031 exchange.

Stu

I have a client who has a house in another state. She has used it

Good luck - but before you do that, I would insist that her accountant provide you with some type citation for that rule. Frankly, I don't think it exists.

You may be thinking of a Rev. Proc. that dealt with the holding period of a dwelling unit in order for it to qualify for a 1031 exchange.

See Revenue Procedure 2008-16 for a safe harbor under which the Internal Revenue Service will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of § 1031 of the Internal Revenue Code.

I forgot to add some comments. I believe this RP was issued to not just provide a safe harbor but to make the point that held for investment meant you rented the property.

Land presents a different situation, as it is typically not rented. If you did rent the land, then you have shown intent to hold it for investment. If you don't rent the land, then you only have to show that it was your intent to hold it for an increase in value. Intent can change over time. The mere fact you buy land to build your main home on, does not mean the land is forever personal use property. Things change. If you decide not to build and hold the land for an increase in value, you have investment property. It would seem to me that one way to show intent is either not move out of your current home while you hold the land, or you move to another main home while you hold the land. As to how long you have to hold the land.... I don't know but I would be comfortable with at least one year from the time you decided not to build. Obviously, the more documentation you can come up with about not building a residence for personal use, the better off you would be in an audit.

Thanks, Alan. Seems like that's what the accountant was thinking of.

Stu