Rentals

[Unregistered]

Married clients have a combined AGI of $163,560 and own 6 rental properties. All 6 rentals had losses. One of the 6 was used as a primary residence for the first 3 months of 2004. I checked YES to the question about using it for personal use during the year. This rental unit received $6,300 rent, $12,286 expenses and $2,149 depreciation; for a total loss of $8,135. However, my tax software calculated a total loss of $59 and carried it to Form 1040, Line 17, in spite of the high AGI. I’m puzzled. Why $59; why allowed? Any comments would be appreciated.

[JG EA]

One point on your question.

If they lived in the rental prior to it being a rental then you do not check Yes. The question is for vacation rental use which would only apply for a second home. If they changed their primary home to rental property then all would start at the time the rental would start.

[Snaggletooth]

Don't check "Yes"

Agree with JFG coffee above. The question is intended also to prevent losses from kinfolk who move in and notoriously don't pay market value rent because they are relatives, or worse yet, default on their rent because relative won't kick them out.

As to how your software works, no one can help you without knowing more. If you tell us what software you're using, it's very probable someone on the board is using the same software. They can then create a strawman situation similar to yours and maybe answer your question.

[Armando Beaujolais]

If they lived in the rental prior to it being a rental then you do not check Yes. The question is for vacation rental use which would only apply for a second home. If they changed their primary home to rental property then all would start at the time the rental would start.

I disagree.

The "vacation home rules" are set forth in section 280A. IRC 280A(a) states:

"Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chpater shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence." [exceptions to follow are for business use of the home or qualified rental]

"...as a residence..." There's nothing in section 280A that talks about "primary home."

They just use "vacation homes, etc." in the title to the code section. The mixed-use property rules apply to any home you've used for personal purposes.

The limits on mixed-use property do not apply to deductions that would allowable otherwsie, such as mortgage interest and property taxes. I'm going to guess that combining the allocable mortgage interest and property taxes comes to $59 more than the rent received.

As far as the kinfolk provision, 280A(d)(2) says that any use by a family member is considered personal use, therefore expenses can't be deducted. The exception is in 280A(d)(3) which says it is not considered personal use if the family member paid fair rental value.

The warning is that it's O.K. to rent to family members, but you have to report the rent as income, and you won't be able to deduct expenses if they don't pay fair rental value.

[JG EA]

??????????

Agree with JFG coffee above..

Huh? Just to be clear my huh is for "JFG coffee". I am not too surprised that you agree. Well, yes I am so huh? to that too.

[Bees Knees]

If they lived in the rental prior to it being a rental then you do not check Yes. The question is for vacation rental use which would only apply for a second home. If they changed their primary home to rental property then all would start at the time the rental would start.

I disagree.
They just use "vacation homes, etc." in the title to the code section. The mixed-use property rules apply to any home you've used for personal purposes.

I disagree with Armando.

I think the point JG was making is that the vacation home rules do not apply when you move out of your primary residence and turn it into a rental. The vacation home rules apply to mixed use property. That meaning property you use sometimes for personal and sometime for business or investment.

Switching from strictly a primary residence to strictly a rental during the year is not mixed use property. It is a conversion transaction - converting personal use property to business property. Assuming they never use it for personal use after the conversion, it is treated as 100% business for the portion of the year it was converted to business.

IRS Pub 946 says: "If you converted property held for personal use to use
in a trade or business or for the production of income, treat the property
as being placed in service on the conversion date."

Note that it does not say the date you first used it for personal use, and so it is now mixed use property. The placed in service date for depreciation is the date it is first used for business. This same principal applies to the vacation home rules. What was the first date used for business? From that point on, was it ever used for personal? No. Not a vacation home...Yes, it is a vacation home.

[Bees Knees]

A similar principal is found at Reg. Section 1.165-9 which says:

"(a) LOSSES NOT ALLOWED. A loss sustained on the sale of residential
property purchased or constructed by the taxpayer for use as his personal
residence and so used by him up to the time of the sale is not deductible
under section 165(a).


(b) PROPERTY CONVERTED FROM PERSONAL USE.

(1) If property purchased or constructed by the taxpayer for use as
his personal residence is, prior to its sale, rented or otherwise
appropriated to income-producing purposes and is used for such
purposes up to the time of its sale, a loss sustained on the sale of
the property shall be allowed as a deduction under section 165(a)."


Again, no mention of vacation home rules here for using it part for personal and part for business. It is a separating or conversion type transaction. You convert something from personal to business, it is treated as 100% busines from that point on.

[Armando Beaujolais]

I disagree with Armando.

Mr. Knees disagrees. That's quite poetic if I don't say so myself.

From section 280A:

"Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence."

The operative phrase is "...used by the taxpayer during the taxable year..."

That's pretty clear. No mention of "unless converted to rental or vice versa, etc."

The citations you provided relate to sales and depreciation, and for sales and depreciation the citations are correct, as would be the case for any other purpose (passive, investment, etc.) not covered under 280A. However, section 280A applies to the "deduction," not the sale or computing the placed-in-service date for depreciation.

The "vacation home" designation is misleading. It's part of the heading for the code, but isn't in the applicable law itself. If you could convert your way out of mixed-use property rules, people would use it all the time since for regular residential properties there is seldom more than one switch in a year.

[jainen]

Ironic

I agree with Armando. They used the property personally for three months during the year, so most deductions are limited by income. The loss can be carried forward if the next year is not mixed-use, but then it is subject to passive loss rules. Ironically, were it not for the mixed-used rule they would not have even been allowed the $59 loss, because their AGI is too high for the special loss allowance.

[JG EA]

Pub 527 Page 6

Note what it says in the section of Pub - Residential Rental Property.


"For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you use the property as your main home before or after renting it or offering it to rent as days of personal use." Examples show it changes from personal to rental property.

[jainen]

I change

Good point. I change my vote.

[JON]

Section 280a

Section 280A applies to converted property???? I would be willing to discuss that with an agent-would enjoy that conversation. The rental use started the date it was changed to a rental-basis is the lower of FMV or cost and let the activity begin. Do not worry about mix use unless owner remains in the building. Then there are seperate limitations on deductions and what is rental portion.

[Armando Beaujolais]

Note what it says in the section of Pub - Residential Rental Property.


"For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you use the property as your main home before or after renting it or offering it to rent as days of personal use." Examples show it changes from personal to rental property.

You are correct. It says if you rent it or try to rent it for 12 months you don't have to use those days as personal use.

I think I stand corrected. But I'm still looking for it in the regs.

I just found it. I do stand corrected. The "qualified rental period" is in Reg. 1.280A-1(e)(4)(i). The taxpayer "shall not be considered to have used the rental unit for personal purposes...before..."

Good catch by JG EA. As long as the property will be rented or the attempt will be made to rent it for 12 months, the 280A limit does not apply.

[Bees Knees]

Good catch by JG EA. As long as the property will be rented or the attempt will be made to rent it for 12 months, the 280A limit does not apply.

Of course if I had found that, you would have argued with me for the next three months.

[jainen]

We're going to argue

We're going to argue with you anyway, whether you found it or not.