Is rental property now a trade or business?

[Roland Slugg]

The IRS has long denied the office-in-home deduction for taxpayers who use a portion of their home to manage their rental property activities. The IRS (perhaps the Code and/or Regs as well) says the home office deduction is available only for those who use their home to operate a "trade or business," but not for those who use their home to manage "income producing property" such as rental property.

On page 1 of the 2011 instructions for form 1099-MISC is says the following ... in two places: "Generally, persons receiving rental income from real estate are considered to be in the trade or business of renting property."

Has the IRS just tripped over its own language?

[Bees Knees]

You know as well as I do that IRS instructions cannot reverse decades of court rulings disallowing trade or business status for rental real estate activities. Schedule E has always been an in-between type activity. It is not a trade or business for office in home purposes, self-employment tax, or using profits to contribute to qualified plans. It is a trade or business (as opposed to an investment activity) when it comes to deducting expenses above the line without having to itemize on Schedule A.

[Gary2]

Didn't you get the memo telling you to ignore that paragraph? See http://www.irs.gov/formspubs/article...239708,00.html.

The paragraph in question was inserted as a result of the increased information reporting requirement legislation a couple of years ago. This aspect of the legislation was repealed this past April. (See http://www.gpo.gov/fdsys/pkg/PLAW-11...nt-detail.html. As tax laws go, this one is relatively short and easy.)

It's unfortunate that the IRS couldn't update the instructions in time. Hopefully, by Jan. 1, all tax pros will be aware of the rescission. More importantly is being aware of the need to follow the links in the "What's New" section of the instructions - another good reason for getting the PDF versions online, direct from the IRS web site.

[Bees Knees]

The paragraph in question was inserted as a result of the increased information reporting requirement legislation a couple of years ago. This aspect of the legislation was repealed this past April.

I suspect Roland knows that. However, that is not what he was asking. Assume the legislation was not repealed, and the 1099-Misc rule was still in effect for rentals. With the IRS instructions talking about 1099-Misc trade or business income on Schedule E, would that have meant Schedule E activities are now a trade or business, able to deduct OIH?

My answer would still be no.

[Gary2]

I suspect Roland knows that. However, that is not what he was asking. Assume the legislation was not repealed, and the 1099-Misc rule was still in effect for rentals. With the IRS instructions talking about 1099-Misc trade or business income on Schedule E, would that have meant Schedule E activities are now a trade or business, able to deduct OIH?

My answer would still be no.

You're right, that is a valid question, and I agree with your answer.

[Roland Slugg]

Thanks to Gary2 for the link posted above in which the IRS says to ignore the language I quoted. I hadn't seen that.

And to Bees Knees: Yes, I concur that the IRS can not reverse decades of court rulings (and certainly not the Code itself) via administrative fiat, so I don't believe the suspect wording would have served to do that. At the very least, however, it could have created problems, and it still might if that language is not removed from the Form 1099-MISC instructions.