Resort rental

[think2much]

Taxpayer owns a detached home in a resort development. The resort management handles all the rentals to the tourists. Taxpayer has no personal use of the property. He plans to move into it when he retires in a few years.

1) I don't think he meets the active participation requirements for a loss. Correct?

2) Is this rental home a residential or nonresidental property for depreciation? Residential rental property is defined as "any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis."
Does a resort development fall into the "other establishment" category, and therefore make the taxpayer's rental home a nonresidential rental?

[Roland Slugg]

A detached home is not a hotel. It is residential rental property.

The issue of active participation is not clear in cases like this. I would treat the T/P as an active participant because he has control over the management company he engaged to tend to all the day-to-day tasks. This would be especially true if that management company contacts the owner (or would contact him if the need arose) regarding decisions about major repairs, long-term tenant approval, rental rates, etc. Some tax preparers, however, might treat a client such as yours as not actively participating.

[solomon]

Taxpayer owns a detached home in a resort development. The resort management handles all the rentals to the tourists. Taxpayer has no personal use of the property. He plans to move into it when he retires in a few years.

1) I don't think he meets the active participation requirements for a loss. Correct?

2) Is this rental home a residential or nonresidental property for depreciation? Residential rental property is defined as "any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis."
Does a resort development fall into the "other establishment" category, and therefore make the taxpayer's rental home a nonresidential rental?

In case you did not see the cite on the other board, see Reg. 1.469-1T(e)(3)(ii).

[think2much]

Resort rental

Solomon, thanks for pointing me to Reg. 1.469-1T(e)(3)(ii).

See if I'm understanding it correctly:
Assuming the only two relevant factors for this resort home are "length of stay" and "significant personal services", then
1) If the average length of stay is 7 days or less, it is not a rental.
2) If the average length of stay is between 8 and 30 days, and significant personal services are provided, it is not a rental. If no significant services are provided, it is a rental.

If the activity passes the rental test, the property is residential (27.5 yrs). If it fails the rental test, it is a business and the property is nonresidential (39 yrs). It does not matter whether the property is a detached home or a unit in a multi-unit establishment. Correct?

[solomon]

Solomon, thanks for pointing me to Reg. 1.469-1T(e)(3)(ii).

See if I'm understanding it correctly:
Assuming the only two relevant factors for this resort home are "length of stay" and "significant personal services", then
1) If the average length of stay is 7 days or less, it is not a rental.
2) If the average length of stay is between 8 and 30 days, and significant personal services are provided, it is not a rental. If no significant services are provided, it is a rental.

If the activity passes the rental test, the property is residential (27.5 yrs). If it fails the rental test, it is a business and the property is nonresidential (39 yrs). It does not matter whether the property is a detached home or a unit in a multi-unit establishment. Correct?

That is my understanding.

[dmj4]

What if days of rental change?

I have a rental that averages 7 days one year and 8 days the next year. It goes back and forth but remains in the range of 7-9. The very first year it qualified as a rental and I set it up that way and have continued to put it on Sch E each year.

Thanks!

[Davc]

You're doing it wrong.

[BHoffman]

I'd like to do it right, and will risk asking a dumb question:

How do you calculate the average period of customer use?

[Davc]

Off the cuff I'd say:

total days rented/total times rented

[BHoffman]

Thanks Dave - what is the correct way to handle this if the average use does fluctuate year to year from over 7 days to under 7 days?

[Chief]

Solomon

In case you did not see the cite on the other board, see Reg. 1.469-1T(e)(3)(ii).

Slomon welcome back. It is good to see you back on the Board.

[Davc]

Thanks Dave - what is the correct way to handle this if the average use does fluctuate year to year from over 7 days to under 7 days?

When you change activity you change forms.