Schedule E Rental days reporting

[Gretel]

I looked at the instructions trying to figure out how to report rental days for a 45 unit property. I couldn't find anything addressing this, neither does TTB. I also thought that days available for rent now need to be reported but don't see this on Schedule E. Will this be in effect for 2012? Did I misunderstand? Anyone knows or has an idea?

[Koss]

Rental Days

I didn't know about this, but I work on returns with rental property, so I decided to take a look...

There is a section on Schedule E for 2011 that asks you to fill in the number of "fair rental days," and the number of "personal use days." It's line 2 of Schedule E.

But the instructions are terrible. This is going to cause a lot of confusion, especially for the DIY crowd, and for inexperienced tax pros who rely entirely on the software.

On Schedule E itself, right below line 2, it says:

For each rental real estate property listed, report the number of days rented at fair rental value and days with personal use. See instructions.

The instructions for this line, to borrow a phrase from US Tax Court decisions, are not a model of clarity.

The instructions book for Schedule goes into great detail about how to calculate a ratio, using the number of days, when the property in question is used personally by the taxpayer. The instructions also talk about some very complex differences in the rules that hinge on whether the taxpayer was using the property as a residence. Some days may be considered personal use, but not use as a residence. This happens, for example, when the taxpayer allows friends or family to use it for free, at below-market rent.

When the taxpayer rents the property and also uses it personally, which commonly occurs with vacation homes and timeshares, the rules appear to state that days when the unit was available for rent but not actually rented are not counted at all. They are neither fair rental days nor personal use days.

The following bizarre example appears in Publication 17 (2011):

Example.

Your beach cottage was available for rent from June 1 through August 31 (92 days). Your family uses the cottage during the last 2 weeks in May (14 days). You were unable to find a renter for the first week in August (7 days). The person who rented the cottage for July allowed you to use it over a weekend (2 days) without any reduction in or refund of rent. The cottage was not used at all before May 17 or after August 31.

You figure the part of the cottage expenses to treat as rental expenses as follows.

The cottage was used for rental a total of 85 days (92 − 7). The days it was available for rent but not rented (7 days) are not days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend (emphasis supplied).

You used the cottage for personal purposes for 14 days (the last 2 weeks in May).

The total use of the cottage was 99 days (14 days personal use + 85 days rental use).

Your rental expenses are 85/99 (86%) of the cottage expenses.

When determining whether you used the cottage as a home, the July weekend (2 days) you used it is personal use even though you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. If you have a net loss, you may not be able to deduct all of the rental expenses. See Property Used as a Home, earlier.

I find this example bizarre because it says that "the cottage was not used at all before May 17 or after August 31," but does not explain why. Nevertheless, it also says rather unambiguously that days on which it is available for rent but not rented are not rental days.

I firmly believe that this principle applies only to rental property that is also used for personal purposes by the taxpayer. In other words--

If a rental property is not used for personal purposes by the taxpayer, then days on which the property was available for rent but not rented are still considered to be days on which the property was a rental property. When a property is not used for personal purposes, the general rule is that all expenses are deductible.

This sounds very simple and intuitive. But the instructions do not actually say this anywhere, and Line 2 of Schedule E appears to require the "number of days rented at fair rental value," regardless of whether the property was used for personal purposes.

I don't see any reasonable answer to the question in the original post. It is well accepted that a single building with eight units, or 30 units, or 75 units, can be treated as a single property on Schedule E. It is not feasible to report the "number of days rented at fair rental value" for each of the units. In theory it could be reported as some sort of ratio, i.e., what real estate agents would call the occupancy rate. But that wouldn't make sense. It isn't relevant.

Line 2 appears to be asking for information that is relevant only when the taxpayer also uses the property for personal use.

Suppose the rental is a single family home, and is not used at all for personal use. Suppose further that the taxpayer owned it all year, but only had it rented for seven months of the year. It was available for rent for five months; during one month, it was undergoing substantial repairs and renovation.

Schedule E seems to require that we report that it was rented for 210 days (seven months). Personal use days would be zero. And I suppose that from that information, the IRS could infer that all expenses are deductible, since there is no personal use. But the fact is that the number of days the house was rented has no impact on the deductibility of the expenses. There is no ratio to calculate. The ratio of "days rented" to "total days of use" is inapplicable, because there is no personal use.

In the case of a multi-family residence, the form is asking for information that simply won't fit in those little boxes.

The form is defective. Line 2 is simply not applicable when there is no personal use, but this is not stated on the form.

I've been doing taxes for over twenty years, and I have only made this type of claim in one or two other cases. I do not routinely assert that an IRS form is defective, or that the instructions are inaccurate, incomplete, or ambiguous with respect to a key point. But that is exactly what I think has happened here.

Somehow Schedule E went to a final release without getting properly reviewed.

Gretel, if I was doing the return, I might fill in 365, or just write "N/A." It should be obvious that the days of rental use are not relevant for a property with 45 units.

My guess is that the form will be updated to address this problem. But don't hold your breath. They might not get to it until some time in February. This sort of error may not be a high priority.

BMK

[Snaggletooth]

Geez Burton

What an exposition! But hats off to you for attempting to answer Gretel's question.

Alas, all the verbage was inconclusive, and I must agree. However, I really do believe that the IRS columnar presentation was intended to accommodate multiple properties, but not 45 columns for 45 units. I would condense this to one property on one column. Unless the owner uses any of these units for personal use, I would answer the question "No" on line 2 and move ahead.

I also do not believe "personal use" includes the owner staying in one unit for longer than 14 days in order to make repairs.

[Kram BergGold]

Owner occupied with room rental

Doing a Schedule E when the owner rents out a room has always been tricky for me. Even worse is when the owner has a significant other as the renter and there is no space used exclusively by the renter. Any thoughts on how to deal with the questions of days of rental and personal use?

[Gary2]

I wonder if the IRS is being deliberately obtuse, to avoid calling attention to the IRS vs. Tax Court dispute.

...When a property is not not used for personal purposes, the general rule is that all expenses are deductible.

I believe this should be a single negative, i.e. "When a property is not used for personal purposes, the general rule is ...."

I don't see any reasonable answer to the question in the original post.

I wouldn't lose sleep over those questions.

The form is defective. Line 2 is simply not applicable when there is no personal use, but this is not stated on the form.

I quite agree. Have you submitted feedback to the IRS on this form? In the past, I've been impressed both with the promptness and relevance of the replies I've received; they've always been more than a "thank you for your feedback" form letter.

Somehow Schedule E went to a final release without getting properly reviewed.

Though the general public may not be aware of this, my understanding is that the IRS employs people who are specialists at form design. Judging from recent years (e.g. the 1040X, the 8949 bizarreness), I'm guessing that budget cutbacks have reduced the size, and hence output quality of these departments. Of course, it doesn't help when Congress passes changes in Dec. that have to be implemented by Jan. 17.

Gretel, if I was doing the return, I might fill in 365, or just write "N/A." It should be obvious that the days of rental use are not relevant for a property with 45 units.

I wouldn't be surprised if "N/A" doesn't get through the software, or even if leaving it blank doesn't get through.

[Gary2]

Doing a Schedule E when the owner rents out a room has always been tricky for me. Even worse is when the owner has a significant other as the renter and there is no space used exclusively by the renter. Any thoughts on how to deal with the questions of days of rental and personal use?

In most cases of "significant other" use, it's either shared expenses (not reported at all) or not-for-profit rental (income on line 21, limited expenses on Sch. A subject to 2% floor). See both Pub. 527 and Pub. 535. Thus you don't need to answer the question explicitly.

[Kram BergGold]

Reason for change

I have seen or heard from multiple sources that the IRS has been encouraged to examine more rentals and that they are going to do so. In my opinion, this new infomation will be used as one of the criteria to select returns for audit.

[Koss]

Single Negative

I believe this should be a single negative, i.e. "When a property is not used for personal purposes, the general rule is ...."

Yeah, that was a typo, which I have now edited.

BMK

[Gretel]

Thanks, mainly Koss, but also others.

Yes, defective is right on the mark, and what I can and cannot do will be determined by my software. I will enter 365 for the days rented and not loose sleep.

The form is also defective asking for 1099 info, which we all know does not apply to 2011.

This will be a real fun tax season.

By the way, do you know that we now need to have basis computation worksheets to claim a loss from a K-1?