Rev. Rul. 84-23

ISSUE

Whether the taxpayer, who acquired a house in 1978 and used it as a personal residence until it was converted to rental use in 1982, may recover its cost under the provisions of the Accelerated Cost Recovery System (ACRS) of section 168 of the Internal Revenue Code.

FACTS

A calendar year taxpayer purchased a house in 1978 and used it as a personal residence until it was converted to rental use in 1982. During the entire 1978 to 1982 time period the property was owned by the taxpayer.

LAW AND ANALYSIS

Section 167(a) of the Code provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in a trade or business, or of property held for the production of income. In general, in the case of recovery property (within the meaning of section 168), the deduction allowable under section 168 shall be deemed to constitute the reasonable allowance provided by this section.

Section 168(a) of the Code provides that there shall be allowed as a deduction for any taxable year the amount determined under this section with respect to recovery property.

Section 168(c)(1) of the Code provides that, except as provided in subsection (e), the term "recovery property" means tangible property of a character subject to the allowance for ss or held for the production of income.

Section 168(e)(1) of the Code provides that the term "recovery property" does not include property placed in service by the taxpayer before January 1, 1981. Property is considered placed in service when it is placed in a condition of readiness for a specifically assigned function, whether in the taxpayer's trade or business or the production of income, in a tax-exempt activity, or in a personal activity.

In the situation described in the facts, the taxpayer acquired the property and placed it in service in 1978 as a residence, i.e., for use in a personal activity. Therefore, the property is excluded from the definition of "recovery property" by section 168(e)(1) of the Code.

HOLDING

The taxpayer, who acquired a house in 1978 and used it as a personal residence until it was converted to rental use in 1982, may not recover its cost under the provisions of the Accelerated Cost Recovery System (ACRS) of section 168 of the Code. Taxpayer must recover the cost of the house through depreciation deductions computed in accordance with the rules provided by section 167 of the Code and related sections of the Code (such as section 280A) and any regulations thereunder.