Stephen P. Wasnok v. Commissioner
30 T.C.M. 39 (Tax Ct. 1971)
The Wasnoks were a married
couple who owned a house in Ohio. They tried to sell the house, but the
market was bad, so instead they rented it out. They rented it for four
years, but couldn't rent it for enough to pay the mortgage. So they
defaulted on the loan, and gave the property to the bank.
At the time of the loss, the
Wasnoks didn't have any income, so claiming a loss on their taxes wouldn't
have made a different. A few years later they had some income and so
claimed the house was a long-term capital asset, and so the loss from losing the house was
subject to carry-forward in
subsequent tax years. The IRS disagreed.
The IRS argued that the loss
was ordinary loss deductible only in the year it was sustained, rather
than a capital loss that could be carried over from year-to-year.
26 U.S.C. §1231(a)(2) says that if losses form property used in a
trade or business exceed gains, then those losses should be ordinary
income, not a capital loss.
The Wasnoks' argued that
they were never engaged in a trade or business, and they only rented the
house because they couldn't sell it.
The Tax Court found for the
The Tax Court found that
because the Wasnoks had rented the house continuously for four years,
they were in the trade or business of being a landlord, and the house was
property used in that trade or business.
The Wasnoks were in an unusual
position because most taxpayers want to have an ordinary loss, not a capital loss. But, remember, 26 U.S.C. §§1211-1212
says that for each tax year, you can only deduct $3k of net capital
loss, anything extra is carried
forward and deductible in the next
year (so if you have a $5k loss, you can deduct $3k the first year and $2k
the second year). But ordinary income is not carried forward, so if you had a net adjusted
gross income for a year that's less
than zero, you pay no taxes this year, but you get no additional benefit
the next year.