*1907 In 1922 petitioner exchanged certain improved real estate which he was holding as an investment for other improved real estate and an amount of money. The amount of money received was less than the cost to the petitioner of the real estate exchanged. Held that under section 202(c)(1) and (e) of the Revenue Act of 1921, neither gain nor loss is recognized.
*144 This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent in the amount of $2,008.15 for the year 1922, and $161.39 for the year 1923. At the hearing counsel for the petitioner admitted that there is a deficiency for 1923 in the amount asserted in the deficiency letter. The only issue as to 1922 is whether the respondent erred in disallowing a deduction taken by the petitioner in his return for 1922 on account of a loss claimed to have been sustained by him in connection with an exchange of real estate for money and other real estate.
FINDINGS OF FACT.
For several years prior to 1920 the petitioner was the owner*1908 of a ranch in San Luis Obispo County, Calif., which he had purchased with the idea of making it his permanent residence. However, he became dissatisfied with the ranch as a place of residence and determined to dispose of it, and in 1920 he traded his equity in the ranch for a piece of improved real estate in Jordan Park, San Francisco, Calif. He also assumed a mortgage of approximately $50,000 on the Jordan Park property.
The Jordan Park property was acquired by the petitioner as an investment. It at that time consisted of a lot with a frontage of 95 feet and a depth of 100 feet, improved with an apartment house approximately 3 months old and containing 15 apartments of a total of 72 rooms. Jordan Park was in a restricted district and was a very desirable place of residence. The apartments on the property thus acquired by the petitioner were at that time rented to good tenants and for the succeeding year and six months a vacancy, when one occurred, would last only for a day or two. However, thereafter the property became less desirable and declined in value on account of the erection of new buildings in the neighborhood and *145 the opening of new tracts of land. The*1909 petitioner was also disturbed by complaints of tenants and he decided to dispose of the property. Therefore, in September, 1922, he exchanged the Jordan Park property for a lot on Geary Street, San Francisco, which was improved with a 1-story building containing five stores, and $28,500 in cash. The fair market value of the Jordan Park property at the time it was acquired by the petitioner was $103,570.16, and the depreciated cost or fair market value thereof in September, 1922, was $98,083.16. The fair market value of the Geary Street property when the petitioner acquired it was $57,500. The petitioner paid a commission of $1,125 in connection with said exchange in 1922.
The petitioner in his income-tax return for 1922 deducted from gross income, as a loss sustained on the exchange of the Jordan Park property for the Geary Street property, the amount of $13,294.36. The respondent disallowed the deduction.
OPINION.
MARQUETTE: The deficiency letter asserts deficiencies for the years 1922 and 1923. The petitioner does not dispute the correctness of the respondent's determination as to the tax liability for the year 1923. This leaves for consideration only the issue raised*1910 by the record as to the year 1922. On this issue the petitioner claims that in the transaction described in the findings of fact he exchanged real estate that cost him $98,083.16 for real estate of the fair market value of $57,500, and $28,500 in cash; that his expenses in connection with the exchange were $1,125, and that he therefore sustained a loss of $13,208.16, which he is entitled to deduct in computing his net income for 1922. The respondent takes the position that the transaction in question was one that, under section 202 of the Revenue Act of 1921, did not give rise to either gain or loss, and that in any event the petitioner has failed to establish the cost to him of the real estate he exchanged.
In our opinion the respondent's first contention is well taken and his action with respect to the deduction of the alleged loss should be sustained. Section 202 of the Revenue Act of 1921 provides, among other things, that:
(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the*1911 property received in exchange has a readily realizable market value, no gain or loss shall be recognized -
(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use;
* * *
(e) *146 Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the money or the fair market value of such other property received in exchange shall be applied against and reduce the basis, *1912 provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess.
The petitioner acquired and held the Jordan Park property as an investment and he exchanged it in 1922 for property of a like kind and use, and a certain amount of cash. It appears from the evidence, and we have so found, that the fair market value of the real estate received in exchange, together with the cash received, was less than the depreciated cost to the petitioner of the property exchanged. It seems to us that Congress intended that in such a situation, neither gain nor loss should be recognized at the time of the exchange, but that the cash should be applied to reduce the cost of "such property" exchanged, leaving the matter of gain or loss to be determined upon the subsequent disposition of "such property" received in exchange. This construction is reasonable and is warranted by the terms of the statute cited. The petitioner did not sustain any deductible loss, and the respondent's determination is approved.
Decision will be entered for the respondent.