Depreciation on Trust Rental Property

Hired a good sized accounting firm to do trust returns for three child trusts. 2015 was the first year for the child trusts because the grantor of the administrative trust that created the child trusts passed away in early 2015.
After the death of the grantor of the admin trust, a home in the mountains was converted to a rental property with ownership split among the three child trusts. Because the average stay of the Airbnb patrons was less than 7 days, we had to file as a Schedule C business rather than a Schedule E item. The accounting firm also stated that because we were filing as a Schedule C business activity, the property had to be depreciated as a nonresidential property with a 39 year useful life rather than as a residential property with a 27.5 year useful life.
I was unable to find anything in any IRS Pub (964 and others) that substantiated this statement. I know that logic has no place in the tx code, but mine says that the asset class is determined by the characteristics of the asset rather than by which Schedule you are reporting on. Any comments? There were no personal use days in 2015, and at most, 5 days so far in 2016.
A second item that I was uncertain about was how to prorate things like insurance and property taxes. In my past experience with first and last year allocating, I have prorated based on the number of days the item was in service as a rental. However, the accountant says that if the tax or insurance bill was paid after converting the property into a rental, that we can deduct the whole amount, not just a prorated amount. I can understand the rationale for this approach, but I wondered what was considered "best practice" if there was no official guidance.
Regards, Dan
Reply to
Dan Schumacher
Are you considering publication 946? It distinguishes residential rental property (which this is not, as short-term rental is not considered "rental") and nonresidential real property. You seem to be thinking this is residential nonrental property, which doesn't fit, which is true, but not a tax category.
I could go further into the regulations, if you like, but P946 seems (to me) clear enough.
-- Arthur Rubin, CRTP, AFSP, Brea, CA
Reply to
Arthur Rubin
wrote:
Arthur,
Thanks for your response. Is it possible, and what is the impact, of using IRS Pub 534 instead of 946 to determine your depreciation period? The property was owned by a relative from 1979 until he passed away in 2015. According to Pub 534, we could elect to use a 19 year depreciation period because 2015 was the first year we placed it in service as a rental. Does the exclusion in 946 preclude this approach?
I guess I am just frustrated that the same piece of property can be classed in two different categories simply on the basis of the rental duration. It simply doesn't seem to be consistent with the useful life determination.
Regards, Dan
Reply to
Dan Schumacher
From Pub 534: "Property you acquired before 1981 or after 1986 is not ACRS recovery property."
The three child trusts acquired the property in 2015, well after the 1986 cutoff date for ACRS.
Reply to
Taxed and Spent
Tax accounting and financial accounting are separate beasts. Tax accounting depends on the fluctuating interests of Congress and not on any rational, theoretical foundation. Any attempt to inject logic into tax accounting is bound to lead to frustration.
Ira Smilovitz, EA
Reply to
ira smilovitz
I would guess that your "good sized accounting firm" gave this job to a young but inexperienced junior accountant to prepare the tax returns, one who knows how to read, and who read this in the IRS publication: "Your activity is not a rental activity if any of the following apply: The average period of customer use of the property is 7 days or less," but then didn't really know what that meant.
For one thing, it *doesn't* mean that your activity is a "trade or business" that should be reported on Schedule C. What it does do is help classify your activity for the passive loss rules.
I sure hope the tax preparers didn't report the net income (or loss) from the rental property as self-employment...!!
Did they report it as a passive activity?
Reply to
lotax
The accounting firm got it right. It is a trade or business and it is reported on Schedule C. Schedule E reporting is an "exception" to the usual reporting rules for a business. You need to meet the definition of real estate rental which includes >7 day average lease period (as well as several other conditions) in order to report on Schedule E.
Ira Smilovitz, EA
Reply to
ira smilovitz
So, if it's a trade or business and reported on Schedule C, is it also reported as a trade or business on Schedule SE, for self-employment tax?
Reply to
lotax
I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
Reply to
lotax
There are exceptions - real estate rental income is generally defined as deriving from a rental with more than 7 day average rental period and one where significant personal services are not provided. Also, real estate rental income earned by real estate professionals is subject to self-employment tax. As with anything involving taxes, the devil is in the details.
Ira Smilovitz, EA
Reply to
ira smilovitz
"real estate rental income earned by real estate professionals is subject to self-employment tax" - I believe this is incorrect as a general rule. See 26 U.S. Code § 1402.
Reply to
Taxed and Spent
I guess you didn't read all the way through 1402(a)(1): "there shall be excluded rentals from real estate and from personal property leased with the real estate [...] unless such rentals are received in the course of a trade or business as a real estate dealer ..."
Ira Smilovitz, EA
Reply to
ira smilovitz
You're talking about different things. "Real estate dealer" and "real estate professional" are _different_ terms of law.
In general, real estate rental income is passive; it's non-passive (or, at least, losses are allowed) for real estate professionals, and subject to self-employment tax for real estate dealers.
-- Arthur Rubin, CRTP, AFSP, Brea, CA
Reply to
Arthur Rubin

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