Vacation rental property - Counting the days help needed

[FEDUKE404]

Client has owned a beach property for more than a decade, and has purposely NEVER rented it out, with possible exception of a couple of days each year to close friends who essentially paid a token amount as a goodwill gesture. The property has been duly characterized /used as "second home" for all mortgage/property tax issues.

During 2012, things have changed (overall cash flow issues).

Client rented home for somewhere in the range of 30 days during 2012. Renters paid FMV.

Intent of client is to have the house "available for rent" for only around 50% of the year, namely late spring/summer/early fall. Except for that limited time frame, the property will never be rented. The client intends to continue personal use for a week or so during peak season, and perhaps scattered days for family members to visit. The property will remain, more or less, a second home with some very limited "warm season" rental income. There is no advertising or rental agency or anything in that domain...most renters are very close friends and/or members of church family. (But the "personal use" issue does not apply to their FMV rentals.)

I am aware of the allocations between personal use versus business use, and can fairly easily crunch those numbers. For all intents and purposes, the only thing to be gained is some "piece" of the otherwise personal expenses (insurance/utilities/repairs/etc) to offset the rental income reported on Schedule E.

So, here is the main question: For purposes of allocation, do I "turn on/turn off" the so-called 180-day rental period (including depreciation!) each year, and figure the per cent of allowable expenses on the "available for rent" days, or "the days rented," or even perhaps now the entire year??? It should be noted that 2012 is the first year any reportable rental income has occurred.

Example of the above: Let's say client has $50/month in utilities. Based upon "days rented" (probably somewhere in the 30-ish range), is the denominator 180 days (rental period) or 365 days (all of 2012), or something else? And do you first consider something such as the unreduced utility costs for 2012 to be $300 (six months) or $600 (twelve months)?

My head is spinning from reading the rules on vacation homes. Hopefully someone can steer me in the proper direction as to exactly what "days" to use for the limitations for Sch E. The situation simply does not quite fit into the "conversion to rental property" folder, and the "on/off" scenario is causing me major problems.

Thanks in advance.

FE

[taxea]

all expenses are allocated to the time rented (rental is not considered a business by the IRS) unless the "available for rent" is advertised in some manner. Property tax and mortgage interest is allocated btwn Sch A and Sch E. All other expenses for maintance and repairs, in my mind, are questionable unless he truly has the place available for rent rather than just saying that to justify taking the expense. I would not be ready to split this 50/50 until I am comfortable with what is actually going on here.

[FEDUKE404]

Clarifying my comments

all expenses are allocated to the time rented (rental is not considered a business by the IRS) unless the "available for rent" is advertised in some manner. Property tax and mortgage interest is allocated btwn Sch A and Sch E. All other expenses for maintance and repairs, in my mind, are questionable unless he truly has the place available for rent rather than just saying that to justify taking the expense. I would not be ready to split this 50/50 until I am comfortable with what is actually going on here.

I never said anything about splitting things 50:50. If that was a coincidence from the time frame, my apologies. Client has stated it would only be rented during "warm weather" season, and for purposes of this thread I used the very approximate dates of that time period. Some folks in the area DO rent year-round (fishermen don't mind the cold weather) but this client has chosen NOT to do that.

It is a legitimate, but limited, rental. For 2013 it is likely the place will be rented for 30-40 nights out of the aforementioned approximately six-month "season." How can other expenses be "questionable" in such a scenario ??

My confusion remains how to allocate the use for "vacation-home" pro-ration. For 2013, would I be looking for 30/180 x rental period expenses, 30/365 x all year expenses, or what? Can owner deduct some of annual insurance premiums if it is paid in July, but none of same if it is paid in November?? And then there is the depreciation issue.

Of course, I guess some would just overlook the whole thing: WHAT "rent"?, place unreduced mortgage interest and property taxes on Schedule A, and keep on keepin' on. . . .

FE

[Bees Knees]

If you haven't already done so, you need to review the Bolton decision on how to allocate rental vs. personal days. Using 365 days in the year versus the days available for rent depends on what type of expense we are talking about.

From TTB, page 7-8:

Bolton decision. In Bolton v. Commissioner (July 27, 1981), the Tax
Court allowed a method of allocating expenses for mixed-use
property that was more advantageous to the taxpayer than the IRS
prescribed method. The Boltons allocated mortgage interest and
taxes based on a fraction, using the number of days in the year
as the denominator, instead of the number of days the dwelling
was occupied. They allocated other operating expenses, including
depreciation, according to the IRS method using the number of
days occupied. The Bolton method applied a smaller percentage
to mortgage interest and taxes against the rental, which allowed a
higher amount of other operating expenses to be applied against
the income limit. Interest and taxes not deducted against the
rental were allowed as itemized deductions.

Even though the Bolton method applied a different computation
to interest and taxes than it applied to other expenses, the
Tax Court allowed the method because interest and taxes accrue
evenly throughout the year, but other operating expenses are
more closely connected with actual days of occupancy.

Note that the IRS would prefer the denominator to be the days available for use rather than 365 for ALL expenses, including mortgage interest and taxes (in your case, the 180 days during the year the property is available for rent). That means mortgage interest and taxes offset income faster, leaving less income to be offset by utilities, insurance, and depreciation. Bolton allowed mortgage interest and taxes to be used less on Schedule E and more on Schedule A, thus allowing more of the utilities, insurance, and depreciation to offset income.

[Bees Knees]

all expenses are allocated to the time rented (rental is not considered a business by the IRS) unless the "available for rent" is advertised in some manner. Property tax and mortgage interest is allocated btwn Sch A and Sch E. All other expenses for maintance and repairs, in my mind, are questionable unless he truly has the place available for rent rather than just saying that to justify taking the expense. I would not be ready to split this 50/50 until I am comfortable with what is actually going on here.

I suggest you read TTB, page 7-6 through 7-8. All expenses are not always allocated to the time rented, or "available for rent." And there is no question that maintance, repairs, utilities, insurance, etc. are partially deductible under the vacation home rules, even if the property is mostly used for personal purposes.

[JohnH]

Also, one thing to keep in mind is that days spent working substantially full time on repairs and maintenance do not count as personal days. With some properties and owners this can be a significant consideration, especially if the "rental vs personal" days on on the borderline. I always encourage them to buy any materials they use locally and to take "before and after" pictures with time stamps if possible.