This was years ago. I was I think in my third season with H and R Block. I would not sit for the Special Enrollment Exam until after the end of my fifth season. It was a snowy day in Durham North Carolina, where a couple inches of snow brings everything to a halt. Only a first year preparer and I had made it to work. I got the strangest situation I have so far encountered. My client explained that despite being over thirty and having a good income he lived with his mother who was not mentally or physically infirm nor in need of his financial support. He had invested some of his surplus money in an old filling station with the intent of fixing it up as a rental house. However, he was found by a tenant who wanted to move in and wanted to do the work in exchange for the first several months of rent. Furthermore, my client explained that he had made personal use of the property several times each week almost from the day the tenant moved in. His personal use had consisted of taking female companions to the property at times when the tenant was out, and shall we say getting better acquainted with them. One could also say that he got to know them in the Biblical sense. (He spoke in indirections and It actually took me about five minutes of conversation with him for me to work out what he did in the rental property.) He used the rental property because he was forbidden to use his mother's house for that purpose. I should note that such activity was against a seldom enforced state law and this was before the US Supreme Court said that the law must stay out of the bedrooms of consenting adults.
Now I have explained that I was the highest tax authority in the office that day but my knowledge of residential rental property was limited. I understood that expenses before the place was available for rent became part of basis. I knew how to depreciate the rental property and handle the potential home office, for which the rules at the time were less restrictive than today. I knew what to do with cash rent and cash expenses. I knew that I needed help if the taxpayer had made any personal use of the property or if the taxpayer had received labor in exchange for rent or done personal services or given property to pay for any expense.
So my only half serious question is how would people handle these facts today?
I had to call one of my Mentors who first told me with tension in her voice to use the handset not speakerphone for the conversation and then started to laugh raucously after I told her we were on the handset. Even after she could talk, she kept giggling and saying that the strange cases always seemed to happen to me. However, she gave me advice that still seems sound. The value of the tenant's labor was equal to the rent forgiven and was reported as if paid in cash. The cost of supplies such as boards, drywall, fasteners, paint, carpet, and drapes increased basis. The cost of paintbrushes and other tools as well as dropcloths to protect the tenant's furniture and the floors became "supplies". I told my client to forget that he had ever told me about his personal use of the property and not to tell anyone he had not told already and to be prepared to tell the IRS that he had made no personal use of the property. My mentor explained to me that the usual "personal use of rental property" occurred on days when the property was without a tenant and the personal use lasted over half a day at a time. The relevant rule was intended to limit the deductibility of expenses for a vacation house that also generated some income.
Now I have explained that I was the highest tax authority in the office that day but my knowledge of residential rental property was limited. I understood that expenses before the place was available for rent became part of basis. I knew how to depreciate the rental property and handle the potential home office, for which the rules at the time were less restrictive than today. I knew what to do with cash rent and cash expenses. I knew that I needed help if the taxpayer had made any personal use of the property or if the taxpayer had received labor in exchange for rent or done personal services or given property to pay for any expense.
So my only half serious question is how would people handle these facts today?
I had to call one of my Mentors who first told me with tension in her voice to use the handset not speakerphone for the conversation and then started to laugh raucously after I told her we were on the handset. Even after she could talk, she kept giggling and saying that the strange cases always seemed to happen to me. However, she gave me advice that still seems sound. The value of the tenant's labor was equal to the rent forgiven and was reported as if paid in cash. The cost of supplies such as boards, drywall, fasteners, paint, carpet, and drapes increased basis. The cost of paintbrushes and other tools as well as dropcloths to protect the tenant's furniture and the floors became "supplies". I told my client to forget that he had ever told me about his personal use of the property and not to tell anyone he had not told already and to be prepared to tell the IRS that he had made no personal use of the property. My mentor explained to me that the usual "personal use of rental property" occurred on days when the property was without a tenant and the personal use lasted over half a day at a time. The relevant rule was intended to limit the deductibility of expenses for a vacation house that also generated some income.
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