Personal Use of Rental Property & Sec. 280A

I thought the OP's tax attorney said no FRV for the entire period of the rental, even if more than one year.

You might be right about 2 being easier to defend and 3, but we don't have all the facts. And, I would not hesitate to take position 3 based on what we currently know.

(snip)

For the record, even though I appeared to lean toward (3), I agree it may not pass audit.

I view (1) as a radical view the IRS would never take.

In fact, with (2) couldn't OP claim the missing month as a (non-tax event) gift to daughter, but income for that month?

Then you and I must have read different information from the attorney. ___ Stu

You all are repeatedly missing the fact that the one month at less than FRV isn't a personal month either - because of the less than 10%/14 of days used during the tax year rule. There are 334 days rented at FRV and only

31 (at best) days of personal use which gets ignored per IRC 280A(d)(1).

The entire year is NOT personal use.

(I wrote)

My point (the earliest quote above) what purely about "period of FRV"; that has to be established prior to determining "personal use for tax purposes".

Agreed; both 2 and 3 lead to that conclusion.

Seth

I've been away a few days. Let me clarify by way of example what the tax attorney is saying based on his long history of preparing returns both before the 1981 change when there were no deductions allowed for family member rentals and after the 1981 change. By the way, it was HR 5159 in

1981 that became law.

1. You start with the taxpayer's tax year.

1. You look at the period that the family member is using the property as his home in that tax year.
2. You look to see if you collected FRV from your family member for the period in your tax year that he used the property as his home.

Let us assume you rent the home to your son from 1/1/11 to 6/30/11. In early June you run an ad to obtain a new tenant starting 7/1/11. You don't get a tenant until 10/1/11. FRV for the your property is $500 month. The tenant is paying you FRV. Your son occupied the property for

181 days. The tenant paid rent at FRV for 92 days. If you collect $3000 from your son for the 6 months in 2011 that he rented the home, the days count as rental days. You get all your deductions. If you collect less than $3000 from your son, the days count as personal days. It makes no difference how you collect the $3000. One check, two checks, 26 checks, regular payments, irregular payments, etc. Ya just gotta get the $3000 outta your son.........

Let us assume, you do not collect the $3000 for the 6 months.

As the home was available as rental property for the year, you can use your annual rental expenses as your starting point. Your numerator of rental days = 92. Your denominator of total days of rental = 273 (92 +

181). The remaining days were available for rent days. Let us round the result to 33% was rental use. You can deduct 33% of your interest, 33% of your property taxes, 100% of the advertising, 33% of the home insurance, 33% of the repairs and 33% of the depreciation. However, because of the personal use rules, your deductions can not exceed your total rental income for the year. So... you start to add up your expenses and when the expense tops out at rental income, you stop. The excess gets carried over to your next tax year. The carry over can only be used when you have rental income. Any unused interest and property tax can go on your Schedule A assuming you haven't reached the limit on qualified mortgage interest.

That is his position. He would not sign any return that did not use that method. He claims that there was much discussion of changing the law. He said the no deduction law was in place because Congress had always been concerned about family members gaming the system. When they agreed to change it and write in the exception for FRV, they wanted to ensure that the owner of the property actually received FRV for the applicable period of use. That is why, that section does not discuss days of rental by a family member. The words used were meant to convey, that you had to collect FRV for the period of time that the family member used the property.

Personally, it makes a lot of sense. To allow a taxpayer to take deductions for a length of time that he collects FRV from a family member and not take deductions for the period in which he doesn't get FRV certainly exposes the government to gaming. If you collect FRV for

10 months and provide a free ride for 2 months of a 12 month rental, you have effectively only collected 83% of FRV. It is the same as only charging $417 per month using my above example. In addition, many family members don't pay on a regular basis. What if you collect nothing for 11 months and 30 days from your son, and then he pays you FRV for the full year on 12/31. Did you collect less than FRV for 11 months and FRV for 1 month? Are you only allowed to use one month as rental days and 11 months as personal days? Of course not.

Please note that I posted this so those of you involved with family member rentals would get someone else's perspective. I don't deal with family member rentals given the limited client set I see during the time I volunteer my services. However, at first blush, I thought it was dead wrong. At second blush, I'm coming around to his thinking... Fortunately, it doesn't present a problem for me.

And that is the point on which we disagree. The law explicitly says "any period". It does not say anything about being required to use any specific period.

Therefore, the taxpayer may choose the period for his own benefit; I would choose the first 11 months as the period.

Then why does the law say "any period" and not "the period of time that the family member used the property"?

And if you collected FRV from an outsider for 10 months, and then gave your family member a 2 month free rental, why would that be so different?

In that case, if you choose the "1 year" period, then FRV was paid for that period. Again, the term "any period" is to be construed by the taxpayer, to his best advantage.

(In your example, suppose he paid rent monthly. Does that mean TP collected in excess of FRV one day per month, and nothing the rest? Of course not. Or maybe in excess of FRV one week per month, and nothing the rest? Equally silly. So why should one annual payment of FRV differ?)

Seth

What are examples of gaming? In your example, the son did not pay rent for 6 months, then moved out, then apartment was available for rent for 6 months (of which 2 it was actually rented). So for these 6 months the expenses should be fully deductible? But because of the

10% rule (personal use for more than 10% of the year), the apartment is considered personal for the whole yeraa.