Renting out home to Coporation

[Skate1968]

I have a client renting out part of his home to his corp. I understand that the rental income on him 1040 is not subject to Self Employment tax. But I'm also thinking that this rental income better be reasonable! Meaning the IRS certainly wouldn't like the client taking exhorbitant rental income from the corp while taking a salary far below the current market rate.

I'm thinking that it's necessary to estimate the average commercial rental rate in the area. Then multiply that by square footage. After doing that I would bump up my estimate as it's in the far nicer part of the ZIP code.

Where should i begin? Call RE agents and ask for avrg rent per sq. foot? Is there a website?

thanks

[Brad Imsdahl]

You can start by telling your client to stop renting a portion of his home to his corporation. TTB, page 5-13, “The employee cannot rent any part of the home to the employer and use the rented portion to perform services as an employee for that employer.” Code Section 280A(c)(6)

[OldJack]

You can start by telling your client to stop renting a portion of his home to his corporation. TTB, page 5-13, “The employee cannot rent any part of the home to the employer and use the rented portion to perform services as an employee for that employer.” Code Section 280A(c)(6)

Nonsense. That statement is a misinterpretation of the code. The code section 280A is:

Sec. 280A. Disallowance of certain expenses in connection with
business use of home, rental of vacation homes, etc.

The subject code section has only to do with disallowing expenses and nothing to keep an individual from renting space to a corporation. As long as there is a valid business reason, for the convenience of the employer, and the rent is a fair and reasonable price there is no code that prevents such rental.

However, it is rental income to the individual owner with no deduction for expenses. In some court cases the rent income was determined to be avoiding and therefore subject to self-employment tax.

[New York Enrolled Agent]

I believe TAM 200121070 has a nice discussion on this.

[Brad Imsdahl]

Nonsense. That statement is a misinterpretation of the code. The code section 280A is:

It is not a misinterpretation of the code. The statement in TTB is found under the heading on page 5-13, "Requirements to qualify for a deduction."

In the context of taking a deduction for a home office, the statement is correct.

Obviously, no one in their right mind is going to rent their home office to their corporation, pay tax on the gross rent, and then take no deduction for the office in home expenses.

Therefore, me telling this person to tell their client to knock it off is not a misinterpretation of the code. It is exactly what you would tell your client.

[Snaggletooth]

Portion of Home -

At what point does the home become suitable for rent?

One of my clients owns a S-corp Canoe Rental. There is a large rustic building,
61% of which I have determined is his residence. The remainder of this building
is specifically fitted for canoe and lifejacket storage, as well as a storefront
decorated with whitewater photos and paintings, and a public restroom.

For those of you who believe rent is disallowed (some of you do and some don't),
does your interpretation cover the specially built, fitted, and decorated situation
above? At some point it would appear a structure is more appropriate for a business
and less appropriate for a residence...

[Brad Imsdahl]

Snag, code section 280A deals with taking business deductions for a portion of a dwelling unit used as your personal residence. In the case of a building set up as a duplex, where you have a separation between the portion of the structure used as a residence, and another used as a business, Section 280A would not apply. The difference is a home office used exclusively for business is still part of the same dwelling unit used as a residence, whereas a duplex is considered to have multiple dwelling units contained in the same building.

[Snaggletooth]

Thanks

Thanks Brad. There is a definite separation and walking into the business side is like walking into another world.

I'm relieved to know section 280A doesn't apply.

Thanks, Snag

[Bird Legs]

Question

What if the house is a 2 story house, not a duplex. The 2nd floor is used exclusively
as an office. Would the employee, owner, get to deduct the pro rata share of expenses
against the rent income?

[OldJack]

Obviously, no one in their right mind is going to rent their home office to their corporation, pay tax on the gross rent, and then take no deduction for the office in home expenses.

There you go again making foolish statements. If the fair rental value of the space in the home is great with nominal expense you can certainly be in your right mind to get income out of the corporation without paying otherwise employment taxes or a much higher tax bracket (C-corp). This is just another example of the concept of keeping real estate out of a C-corp to get income out, but in this case it is a space in the home.

The employee cannot rent any part of the home to the employer

Your comment in the above quote/prior post clearly was NOT to say that expenses would be disabllowed... you where saying that rent could not be paid. That was you misinterpreting the code, not TTB.

You would be better advised to simply admit that you made a mis-statement and we would all forget about it. Next time ask yourself what would Pres. Nixon do?

[Brad Imsdahl]

Your comment in the above quote/prior post clearly was NOT to say that expenses would be disabllowed... you where saying that rent could not be paid. That was you misinterpreting the code, not TTB.

I was quoting TTB, under the heading of "Requirements to qualify for a deduction."

Believe what you want, that’s what I was quoting.

What if the house is a 2 story house, not a duplex.

It has to be a separate dwelling unit. A Separate floor is not necessarily a separate dwelling unit.

[Donanita]

Accountable Plan

Could the shareholder/owner not establish an accountable plan and have the S-Corp pay the sh/owner the expenses related for the use of the home.

[geekgirldany]

What if the house is a 2 story house, not a duplex. The 2nd floor is used exclusively
as an office. Would the employee, owner, get to deduct the pro rata share of expenses
against the rent income?

Block the second floor off with a door or a huge wall... write across the wall or door. THIS IS MY OFFICE SPACE. I DO NOT LIVE IN THIS SPACE. Then build stairs from the outside of the house to the second floor. Cut a place for a door and hang out a sign that has the business name and phone number on it. Maybe buy one of those neon open signs. This should separate it from where the person dwellssss.

I'm just kidding of course.

[geekgirldany]

Could the shareholder/owner not establish an accountable plan and have the S-Corp pay the sh/owner the expenses related for the use of the home.

That is what I do. But I just reimburse utilities, phone, etc.

I had a fellow come today who wrote his mortgage payments out of his corporation. Now he didn't even ask me if he could do this. Can you believe that?

[veritas]

Sure do

We have had clients we had to send down the road because of that. Their response is always "the other accountant did it". My response is always "go to the other accountant".