| |
:: Passive Activity Loss ATG - Exhibit 2.7: Vacation Rentals/Condos/B&Bs/ Hotels Reg. § 1.469-1T(e)(3)(ii) and Reg. § 1.469-5T(a)
Exhibit
2.7: Vacation
Rentals/Condos/B&Bs/ Hotels Reg.
§ 1.469-1T(e)(3)(ii) and Reg. §
1.469-5T(a)
ISSUE:
Should the activity be treated
as a rental real estate activity
qualifying for the $25,000
offset, OR should it be treated
like a business in which
taxpayer must materially
participate (Reg. §
1.469-5T(a)). Condos rented on
average seven days or less are
treated as businesses.
If taxpayer
deducted losses from a vacation
rental or condo on Schedule E,
Schedule C or line l of Form
8582, giving himself the benefit
of the $25,000 offset, ask . . .
_____ Did
the taxpayer or related parties
spend more than 14 personal days
at the property OR 10
percent of the days rented at
fair rental value? In other
words, are deductions limited
under IRC § 280A(c)(5)? If so,
the passive loss rules do not
apply. See IRC § 469(j)(10).
Losses are limited to income
from the activity under IRC §
280A. In other words, expenses
may not be deducted beyond gross
rents under IRC § 280A.
Qualified residence interest and
taxes that exceed gross income
may be deducted on Schedule A as
itemized deductions.
If IRC § 280A
does not apply, pursue passive
loss issue:
_____ What
is the average rental period?
The activity is
not deemed a rental and does not
qualify for the $25,000 offset
if:
-
The average
period of customer use is 7
days or less; OR,
-
The average
period of customer use is 30
days or less and significant
personal services are
provided (such as maid
service, cleaning services,
etc.)
If neither of
the above apply, the taxpayer
qualifies for the $25,000
offset, if active. If either of
the above exceptions apply, the
activity is not a rental
activity. It is treated as a
business , and the far more
stringent material participation
standard applies.
QUESTIONS to
ask if rental period requirement
is not met, and the taxpayer
must materially participate:
_____ Is
there a management service or
anyone who manages the property
other than the taxpayer?
_____ How
many hours a month does the
taxpayer spend working on
activity? Ask taxpayer to
provide documentation of hours
worked for the years under
examination. The initial
interview is the best time to
secure a statement from the
taxpayer of hours and types of
participation performed. If
statements are self-serving or
questionable, be sure to request
telephone records, documents or
third party verification to
corroborate taxpayer's
statements. The IRS does not
need to accept self-serving
testimony or narrative
summaries, which do not make
sense.
_____ Does
taxpayer and/or spouse work more
than 500 hours a year on
activities related to the
vacation rental? Reading
reports and otherwise monitoring
the condo in a non-managerial
capacity does not constitute
material participation.
_____ Does
the taxpayer perform
substantially all the work?
If there is a
management firm, the answer is
no.
_____ Does
the taxpayer work at least 100
hours and no one works more?
If there is a
management firm, it would be
difficult for taxpayer to meet
this standard. See Reg. §
1.469.5T(f)(2)(ii). It is the
taxpayer's burden to prove how
many hours he worked and how
many hours employees worked. If
taxpayer is not involved in
day-to-day management or
operations, certain activities
are disregarded when counting
hours for material
participation. The following
activities would not constitute
material participation: studying
financial reports, preparing
analysis for taxpayer's own use,
and monitoring finances or
operations in a non-managerial
capacity. Periodic consultation
is not sufficient to meet
material participation standard.
_____ Does
taxpayer have several passive
businesses with losses in which
he participates 100-500 hours,
and the total participation in
these activities exceeds 500
hours?
_____ Did
taxpayer materially participate
for any 5 out of the last 10
years?
_____ Do
facts and circumstances indicate
taxpayer materially
participates? This test in
Reg. § 1.469-5T(a)(7) does not
apply unless the taxpayer worked
more than 100 hours a year.
Furthermore, it does not apply
if (1) any person received
compensation for managing the
activity or (2) if any person
spent more hours than taxpayer
managing the activity.
NOTE: If
the taxpayer's statements or
narrative summary appears to be
self-serving or questionable, be
sure to request supporting
documents, telephone records or
third party verification. We
need not accept at face value
uncorroborated testimony if it
is questionable, improbable or
unreasonable.
_____
Request any management contract
with condo association’s
responsibilities highlighted.
Frequently, there is little left
for the taxpayer to do.
CONCLUSION:
Activity does/does not meet the
definition of a rental per
Reg. §
l.469-lT(e)(3)(ii) and taxpayer
does/does not meet the material
participation standard per Reg.
§ l.469-5T(a). If activity is
not a rental and taxpayer is not
materially participating, loss
is disallowed unless taxpayer
has other passive income on the
return.
|
|
