Allocating Schedule E Rental Expenses

Boris snipped-for-privacy@nospam.invalid wrote in news:XnsAB79D96916B09nospamnospaminvalid@144.76.35.198:

I meant to say that taxes would have been $197 LESS.

Not a

Section 280A of the Internal Revenue Code and various Tax Court cases confirm that other than mortgage interest and property taxes your allocation of operating expenses to the rental is based on the ratio of rental days over the sum of rental days and personal use days. Mortgage interest and property taxes are based on rental days over total days in the year (365 or 366). I am not aware of any exception to the use of days for allocating to rental use. Maybe some other professional reviewing this will be aware of a case that made exceptions to the use of days rules for certain operating expenses.

I agree, Alan. I'm not aware of any other way to apportion costs in that kind of situation either. If someone has another approach that makes economic sense, the IRS may well go along with it, as they sometimes do in other situations. But it would really have to be financially completely reasonable and sensible.

If there are expenses that are solely related to Air BnB, those would likely be fully deductible. But anything else would not be.

I can't find a cite to support it, but according to Worksheet 5-1 in Publication 527, "direct rental expenses" can be fully deducted on line 2d of said worksheet. These expenses are described as:

"Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity."

But I wouldn't go out of my way to expand on the list of items explicitly mentioned.

Using the Pub doesn't always give one the right answer as Pubs can be misleading. E.g., That Worksheet 5-1 in the Pub explicitly states it is to be used if your rental is at a loss. Otherwise, you use the rules found under the heading of Dividing Expenses. That section tells you to use the number of days rule for your rental expenses. This begs the question as to whether that Worksheet is ever used when you have a profit.

After a bit of further research (checking what other tax pros are doing and how the software developers provide instructions) I have concluded that when the rental meets the definition of being a residence (you use it for personal purposes during the tax year for more than the greater of: 14 days, or 10% of the total days you rent it to others at a fair rental price) you take your deductions in a specific pecking order. That pecking order is what is on Worksheet 5-1.

That worksheet allows for operating expenses directly related to the rental portion to be deducted fully (assuming there is still a profit). No pro ration of those expenses are required.

So, I am revising my original post to state that once you determine that the vacation rental meets the test to be a residence, you follow what is in that Worksheet and use the number of days rules whenever you have an expense that requires pro-ration between rental and personal use.

Excellent analysis, Alan. I agree 100%.

Alan snipped-for-privacy@vacationmail.com wrote in news:r48lkm$er0$ snipped-for-privacy@dont-email.me:

Thank you much for doing all that research.

I downloaded Worksheet 5-1, and compared it to the software version of the "Vacation and Home Limitation Worksheet - Supporting Calculatioins for Schedule E, Page 1" that my current preparer used.

I followed the instructions on page two of Worksheet 5-1 and filled out both Worksheet 5-1 and my preparer's Vacation and Home Limitation Worksheet. There were no instructions on my preparer's worksheet. For instance, Line 4a simply said, "Rental portion of expenses direclty related to operating or maintaining the dwelling unit (Sch E, lines 6, 7,

9, 10, 10, 14, 15, 17, and 19), but from the instructions on Worksheet 5-1, I knew to use rental use divided by (rental use plus personal use). When I did that, both worksheets came up with the same amounts. I continued on, and both worksheets came up with the same amounts in all categories. So, my current preparer's software seems to follow Worksheet 5-1. That's fine.

But, I may argue next year that processing fees, which are paid to AirBandB, are a 100% direct cost. Cleaning fees are also a direct cost; they are paid to an agency that comes in and cleans after each rental.

By the way, the former preparer include his software's form "Statement of Rental and Royalty Income", which shows how the rental expenses were divided (incorrectly?) between business and personal, while the current preparer's submission included the "Vacation and Home Limitation Worksheet

- Supporting Calculatioins for Schedule E, Page 1", divided correctly per Worksheet 5-1 instructions.

Thanks for the all your effort.

I would argue that the cleaning of the home, even if directly after the rental, applies to personal use as well and should be allocated. But hey, that's just my opinion.

...and in my opinion, your opinion is correct! :-)

The kinds of expenses that are 100% deductible have nothing to do with the maintenance or operation of the home itself. Rather, they have to do with the business transaction of renting the home. Or so it seems...

On the other hand, do people who don't rent out their home actually ever clean them? OK, I'm a single guy - your mileage may vary. :-)