Vacation Home Deductions 2018

Transcription

1 Vacation Home Deductions 2018 Mark A. Vogel Tax Education Services Denver, Colorado (Handouts pages.)

2 Administrative Matters 1. Reference Materials: a. Download (within three days from your Personal Page): 1) Handouts file contains the PowerPoint presentation 2. Questions for the Instructor: a. LIVE Questions During the Seminar: 1) Voice: ) Typewritten: a) Click: On next to Live Course Link on your Personal Page b) Click: On the Speech Bubble in the bottom right corner of the seminar viewing screen b. Post-Seminar Questions: 1) OR 3. Computer Problems: a. Call the Office: VHD.18 2 Course Objectives Learn Something 1. Understand the rules regarding a vacation home under 280A. 2. When is the interest on a vacation home deductible on Schedule A? See 2010 Schedule E, L.2 & No. ((Personal use 14 days & rental days > 14 days) The interest allocated to personal use is not deductible on Schedule A. Must personally use the property for more than 14 days for the interest allocated to personal use to be deducted on Schedule A.) 3. When to usethe Bolton (2010 Shdl Schedule E, L.2 Yes Personal use > 14 days) or the Regulation (2010 Schedule E, L.2 No Personal use 14 days) method for allocating interest and taxes between business and non-business use. In 2018, advantageous to ensure that personal use is greater than 14 days as long as debt on principal residence and vacation home not more than $750,000. VHD.18 3

3 Course Objectives 4. The effect of nonqualified use of a principal residence. For use beginning on or after January 1, 2009 See 121(b)(4). Move into rental property or vacation home and use as a principal residence for two years. 5. Like-kind exchange rules as they relate to a vacation home. LKE of vacation home for commercial property. (See Rev. Proc ) What advice would you give to a client? 6. If sell vacation home at a loss, is the loss deductible? (See Redisch.) Bad facts make for bad law. VHD.18 4 Statutory Language - 280A: Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. (a) General Rule Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. What is a dwelling unit & when used as a residence? See 2010 Sch. E. Yes Personal use > 14 days used as a residence Boat, motor home, Airstream travel trailer bed, bath & kitchen What is a qualified residence? See 163(h)(4). 1. Principal residence 2. Vacation home used personally for more than 14 days 3. Vacation home never rented VHD.18 5

4 Statutory Language - 280A (b) Exception For Interest, Taxes, Casualty Losses, Etc. Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). Interest and Taxes See Rev. Proc Simplified Safe Harbor Method for Home Office See also 469(j)(10) which states that if 280A(c)(5) applies, the loss is not subject to 469. VHD.18 6 Statutory Language - 280A: Home Office Provision (No) (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (1976) Home Office Deduction (1) Certain Business Use Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis (A) as the principal place of business for any trade or business of the taxpayer (Soliman Time & functions), (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. VHD.18 7

5 Statutory Language - 280A: Home Office Provision (No) (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (1976) Home Office Deduction (1) Certain Business Use Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. (Do U care for 2018?) For purposes of subparagraph (A), the term principal place of business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business. (1997) (Trumps Soliman Place where manage or administer trumps time & functions) VHD.18 8 Statutory Language - 280A (No) (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (2) Certain Storage Use Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer's trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business. Mary Kay Store inventory VHD.18 9

6 Statutory Language - 280A (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (3) Rental Use Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)). Vacation Home which is rented Subsection (e) How many business and nonbusiness days? Must allocate expenses between business and nonbusiness, except if rent for 14 days. VHD Statutory Language - 280A (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (4) Use In Providing Day Care Services. (A) In General Subsection (a) shall not apply to any item to the extent that such item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer's trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves. Form ,760 = 24 x ,784 = 24 x What is an Adult Day Care Center? VHD.18 11

7 Statutory Language - 280A (No) (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (4) Use In Providing Day Care Services. No License, then (c)(4) N/A. (B) Licensing, Etc., Requirement Subparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A) (i) (ii) has applied for (and such application has not been rejected), has been granted (and such granting has not been revoked), or (iii) is exempt from having, a license, certification, registration, or approval as a day care center or as a family or group day care home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of VHD Statutory Language - 280A (No) (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (4) Use In Providing Day Care Services.(See Line 5 of Form 8829.) (C) Allocation Formula If a portion of the taxpayer's dwelling unit used for the purposes described in subparagraph (A) is not used exclusively for those purposes, the amount of the expenses attributable to that portion shall not exceed an amount which bears the same ratio to the total amount of the items allocable to such portion as the number of hours the portion is used for such purposes bears to the number of hours the portion is available for use. Allocation of indirect expenses If available for 2,500 hours each year, what is the allocation formula? (2,500 8,760) VHD.18 13

8 Statutory Language - 280A (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (May not create aloss if H.O., M.K. & Daycare) (5) Limitation On Deductions In the case of a use described in paragraph (1) (H.O.), (2) (M.K.), or (4) (Daycare), and in the case of a use described in paragraph (3) (Rental), where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of (A) the gross income derived from such use for the taxable year, over Residence Personal use > 14 days May not create a loss in most situations VHD Statutory Language - 280A (B) the sum of (i) (ii) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used (operating expenses, interest and taxes), and (May create loss and see 469(j)(10).) the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year (maintenance, utilities and depreciation but may not create a loss). Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year. (See Scott.) What is purpose of Form 8829? VHD.18 15

9 Statutory Language - 280A (No) (c) Exceptions For Certain Business Or Rental Use; Limitation On Deductions For Such Use. (6) Treatment Of Rental To Employer Paragraphs (1) and (3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer. (See Feldman.) Rent Home Office to ER Then none of associated expenses deductible as a business expense. May only deduct interest and taxes on Schedule A. But in 2018, end up with the same result as an employee with no rental. Includes renting space in house to Form 1065 and Form 1120S. But what about a reimbursement? VHD Statutory Language - 280A (d) Use As Residence. See2010Sch.E,L.2 (Yes Used as a residence; No Not used as a residence.) (1) In General For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental. For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes. How many days must the unit be rented before the 10% rule applies? ANS: Approximately 150 days VHD.18 17

10 Statutory Language - 280A (d) Use As Residence. (2) Personal Use Of Unit For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used (A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person; (Rent to sister at FMV) (B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or (U & I have a vacation home) (C) by any individual (other than an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental. (Rent to boss at 60% of the FMV.) VHD Statutory Language - 280A (d) Use As Residence. (2) Personal Use Of Unit For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used The Secretary shall prescribe regulations with respect to the circumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this paragraph, except that if the taxpayer is engaged in repair and maintenance on a substantially full time basis for any day, such authority shall not allow the Secretary to treat a dwelling unit as being used for personal use by the taxpayer on such day merely because other individuals who are on the premises on such day are not so engaged. (See Twohey.) Repair day is not a personal day and not a trade or business day. Drive or fly to check on unit. VHD.18 19

11 Statutory Language - 280A (d) Use As Residence. (3) Rental To Family Member, Etc., For Use As Principal Residence. (A) In General A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person's principal residence. Rent to relative at FMV and relative uses the property as a principal residence. Not considered as personal use. But if rent to daughter or Mom for less than FMV, then is considered personal use See Langley and Okonkwo. VHD Statutory Language - 280A (d) Use As Residence. (3) Rental To Family Member, Etc., For Use As Principal Residence. (B) Special Rules For Rental To Person Having Interest In Unit. (i) Rental Must Be Pursuant To Shared Equity Financing Agreement Subparagraph (A) shall apply to a rental to a person who has an interest in the dwelling unit only if such rental is pursuant to a shared equity financing agreement. (Title held by Parent & Child.) (ii) Determination of Fair Rental In the case of a rental pursuant to a shared equity financing agreement, fair rental shall be determined as of the time the agreement is entered into and by taking into account the occupant's qualified ownership interest. VHD.18 21

12 (d) Use As Residence. Statutory Language - 280A (3) Rental To Family Member, Etc., For Use As Principal Residence. (C) Shared Equity Financing Agreement For purposes of this paragraph, the term shared equity financing agreement means an agreement under which (F & D purchase residence & D uses as a Principal Residence.) (i) (ii) 2 or more persons acquire qualified ownership interests in a dwelling unit, and the person (or persons) holding 1 or more of such interests (I) is entitled to occupy the dwelling unit for use as a principal residence, and (II) is required to pay rent to 1 or more other persons holding qualified ownership interests in the dwelling unit. VHD Statutory Language - 280A (No) (d) Use As Residence. (3) Rental To Family Member, Etc., For Use As Principal Residence. (D) Qualified Ownership Interest For purposes of this paragraph, the term qualified ownership interest means an undivided interest for more than 50 years in the entire dwelling unit and appurtenant land being acquired in the transaction to which the shared equity financing agreement relates. VHD.18 23

13 Statutory Language - 280A (d) Use As Residence. (4) Rental Of Principal Residence. (A) In General For purposes of applying subsection (c)(5) to deductions allocable to a qualified rental period, a taxpayer shall not be considered to have used a dwelling unit for personal purposes for any day during the taxable year which occurs before or after a qualified rental period described in subparagraph (B)(i), or before a qualified rental period described in subparagraph (B)(ii), if with respect to such day such unit constitutes the principal residence (within the meaning of section 121) of the taxpayer. Convert principal residence to rental property on July 1, Days before July 1 are not counted in determining use on or after July 1, VHD Statutory Language - 280A (d) Use As Residence. Convert principal residence to rental property on July 1, (4) Rental Of Principal Residence. (B) Qualified Rental Period For purposes of subparagraph (A), the term qualified rental period means a consecutive period of (i) () 12 or more months which begins or ends in such taxable year, or (ii) less than 12 months which begins in such taxable year and at the end of which such dwelling unit is sold or exchanged, and for which such unit is rented, or is held for rental, at a fair rental. VHD.18 25

14 Statutory Language - 280A (e) Expenses Attributable To Rental. Regs.vs.Bolton Method (1) In General In any case where a taxpayer who is an individual or an S corporation uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used. (2) Exception For Deductions Otherwise Allowable This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented. (Interest and Taxes) VHD Statutory Language - 280A(e) 280A(e): Not Used as Residence Used as Residence (1) Rental days is 90 OR (2) Rental days is 80 Personal days is 10 Personal days is 20 How much of interest and taxes is allocated to business and how much to non-business? Regulation Mthd Method: (1) 90/100 (2) 80/100 Bolton Method: (1) 90/365 (2) 80/365 VHD.18 27

15 Statutory Language - 280A (f) Definitions And Special Rules. (1) Dwelling Unit Defined For purposes of this section (A) In General The term dwelling unit includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit. (Basic living accommodations Bed, bath & kitchen) (B) Exception The term dwelling unit does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. (Means Schedule C) B& B (vs. rent room in residence to college student) (vs. ST or LT rental) Airbnb Dwelling unit or hotel, motel or inn VHD Statutory Language - 280A (f) Definitions And Special Rules. (2) Personal Use By Shareholders Of S Corporation In the case of an S corporation, subparagraphs (A) and (B) of subsection (d)(2) shall be applied by substituting any shareholder of the S corporation for the taxpayer each place it appears. Partner in partnership also equal to taxpayer. U & I own a Vacation Home in an S corporation or an LLC. VHD.18 29

16 Statutory Language - 280A (f) Definitions And Special Rules. (3) Coordination With Section 183 If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year (A) section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but (B) such year shall be taken into account as a taxable year for purposes of applying subsection (d) of section 183 (relating to 5-year presumption). 280A trumps 183 Why interest & taxes, maintenance & utilities and then depreciation? VHD Statutory Language - 280A (f) Definitions And Special Rules. (4) Coordination With Section 162(a)(2) Nothing in this section shall be construed to disallow any deduction allowable under section 162(a)(2) (or any deduction which meets the tests of section 162(a)(2) but is allowable under another provision of this title) by reason of the taxpayer's being away from home in the pursuit of a trade or business (other than the trade or business of renting dwelling units). 162(a)(2) Travel expenses while away from tax home overnight for a temporary period of time. Contractor or architect owns a vacation home in resort area Stays in vacation home for one month while working on a project in resort area. Expenses are deductible and days are business days. Larry Ellison & Lanai VHD.18 31

17 Statutory Language - 280A (g) Special Rule For Certain Rental Use Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then (1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed,and (2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61. Referred to as Master s Provision for Augusta, GA and mention property in Aspen that rented for $321,000 for 21 days. Also mention President Obama Secret Service rented a house for $3,000/day for ten days. (Google) VHD Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (A) In General The term qualified residence interest means any interest which is paid or accrued during the taxable year on (i) (ii) acquisition indebtedness with respect to any qualified residence of the taxpayer, or home equity indebtedness with respect to any qualified residence of the taxpayer. For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued. VHD.18 33

18 Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (B) Acquisition Indebtedness. (i) In General The term acquisition indebtedness means any indebtedness which (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer,and (II) is secured by such residence. (Must the debt be secured by the property so purchased? MentionJohn Sununu.) Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. VHD Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (B) Acquisition Indebtedness. (ii) $1,000,000 Limitation The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return). (See Bronstein and Voss.) VHD.18 35

19 Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (C) Home Equity Indebtedness. (i) (ii) In General The term home equity indebtedness means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed (I) (II) the fair market value of such qualified residence, reduced by the amount of acquisition indebtedness with respect to such residence. Limitation The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual). (See Bronstein and Voss.) VHD Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (F) Special Rules For Taxable Years 2018 Through (i) In General.--In the case of taxable years beginning after December 31, 2017, and before January 1, 2026 (I) Disallowance Of Home Equity Indebtedness Interest.-- Subparagraph (A)(ii) shall not apply. (II) Limitation On Acquisition Indebtedness.--Subparagraph (B)(ii) shall be applied by substituting $750,000 ($375,000 for $1,000,000 ($500,000. When do you apply the $750,000? VHD.18 37

20 Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (F) Special Rules For Taxable Years 2018 Through (i) In General.--In the case of taxable years beginning after December 31, 2017, and before January 1, 2026 (III) Treatment Of Indebtedness Incurred On Or Before December 15, Subclause (II) shall not apply to any indebtedness d incurred on or bf before December 15, 2017, and, in applying such subclause to any indebtedness incurred after such date, the limitation under such subclause shall be reduced (but not below zero) by the amount of any indebtedness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of this subsection for the taxable year. (Old Debt vs. New Debt) VHD Statutory Language 163(h)(3): Interest (No) (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (F) Special Rules For Taxable Years 2018 Through (i) In General.--In the case of taxable years beginning after December 31, 2017, and before January 1, 2026 (IV) Binding Contract Exception.--In the case of a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, subclause (III) shall be applied by substituting April 1, 2018 for December 15, VHD.18 39

21 Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (F) Special Rules For Taxable Years 2018 Through (iii) Treatment Of Refinancings Of Indebtedness. (I) In General.--In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(iii) as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. VHD Statutory Language 163(h)(3): Interest (h) Disallowance of Deduction for Personal Interest. (3) Qualified Residence Interest For purposes of this subsection (F) Special Rules For Taxable Years 2018 Through (iii) Treatment Of Refinancings Of Indebtedness. (II) Limitation On Period Of Refinancing.--Subclause (I) shall not apply to any indebtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing). (iv) Coordination With Exclusion Of Income From Discharge Of Indebtedness.--Section 108(h)(2) shall be applied without regard to this subparagraph. VHD.18 41

22 Statutory Language 163(h)(4): Interest (h) Disallowance of Deduction for Personal Interest. (4) Other Definitions And Special Rules For purposes of this subsection (A) Qualified Residence. (i) In General The term qualified residence means Principal Residence (I) the principal residence (within the meaning of section 121) of the taxpayer,and Personal Use > 14 Days (II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)). )) Vacation Home Not Rented or Rented 14 Days and Personal Use 14 Days (ii) Married Individuals Filing Separate Returns. (iii) Residence Not Rented For purposes of clause (i)(ii), notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year. (If rental days are 90 and personal use days are 10, how much of the interest attributable to 10 days is deductible?) VHD Statutory Language (No) 56: Adjustments in Computing AMT Income (e) Qualified Housing Interest (See Line 4 of Form 6251.) For purposes of this part (1) In General The term qualified housing interest means interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which (A) is the principal residence (within the meaning of section 121) of the taxpayer at the time such interest accrues, or (B) is a qualified dwelling which is a qualified residence (within the meaning of section 163(h)(4)). Such term also includes interest on any indebtedness resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence; but only to the extent that the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness immediately before the refinancing. (Same definition as Acq. Debt.) VHD.18 43

23 Statutory Language 56: Adjustments in Computing AMT Income (e) Qualified Housing Interest For purposes of this part (2) Qualified Dwelling The term qualified dwelling means any (A) house, (B) apartment, No Boat (C) condominium, or (D) mobile home not used on a transient basis (within the meaning of section 7701(a)(19)(C)(v)), including all structures or other property appurtenant thereto. (But no Boat.) Motor home vs. double-wide. (What does transient mean?) VHD Statutory Language 56: Adjustments in Computing AMT Income (e) Qualified Housing Interest For purposes of this part (3) Special Rule For Indebtedness Incurred Before July 1, 1982 The term qualified housing interest includes interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued on indebtedness which (A) was incurred by the taxpayer before July 1, 1982, and (B) is secured by property which, at the time such indebtedness was incurred, was (i) (ii) the principal residence (within the meaning of section 121) of the taxpayer, or a qualified dwelling used by the taxpayer (or any member of his family (within the meaning of section 267(c)(4))). VHD.18 45

24 Interest and the $750,000 Debt Limit Assume that the debt on the principal residence is $750,000 the debt is from The year is Purchase a vacation home in 2018 and the dbti debt is $500, VHD Interest and the $750,000 Debt Limit Assume that in 2018, the property is never rented and personal use is more than 14 days. Since the unit is used for more than 14 days, it is a residence and none of the interest is deductible on Schedule A since the debt exceeds the $750,000 limit. Now assume, for 2018, rent the vacation home for 90 days and use it personally for ten days. The property is not used as a qualified residence within the meaning of 163(h)(4). If use the regulations method to allocate the expenses, 90% of the interest is deductible on Schedule E and 10% is not deductible since the vacation home is not a qualified residence. VHD.18 47

25 Interest and the $750,000 Debt Limit Now assume that the property is rented for ten days and personal use is also ten days. The property is not used as a qualified residence (and I do not elect the may treatment under 163(h)(4)). None of the interest is deductible on Schedule A as acquisition debt, but 163(d) now allows the interest to be treated as investment interest under 164(d). The language under 163(h)(4)(A)(iii) states that the unit may be treated as a residence. It does not say is treatedt as a residence. VHD Interest and the $750,000 Debt Limit Assume that in 2018, the vacation home is rented for 80 days and used personally for 20 days. Now the vacation home is used as a qualified residence since personal use exceeds 14 days. None of the interest allocated to personal interest is deductible using either the regulations method or the Bolton method. Question Can we use the regulations method and allocate 80% of the interest to Schedule E? Does the fact that the property is used as a qualified residence negate any of the interest since the debt is in excess of $750,000? My answer is that if use the regulations method, allocate 80% of the interest to business use and both the business interest and 80% of the other business expenses are limited by 280A. Only the interest allocated to personal use is not deductible since the debt exceeds the $750,000 limit. VHD.18 49

26 Interest and the $750,000 Debt Limit The simple point is that if the debt on the principal residence is close to the $750,000 limit, a client has two options: 1. Either rent the property and keep personal use to 14 days or less so the property is not used as a residence; or 2. Do not rent the property and keep personal use to 14 days or less. The property is not used as a qualified residence and the interest is deductible as investment tinterest tunder 163(d). (See Form 4952.) VHD Vacation Homes Different possibilities include: No rental and all personal use. No rental and no personal use. Rental < 14 days. For these problems, I am assuming that the debt on principal residence & vacation home do not exceed the $1.1M for old debt & $750k for new debt. Vacation Home Int. $12,000 Taxes 3,000 Main./Util. 6,000 Dep. 9,000 Total $30,000 No personal use and all rental. Personal use < 14 days and rental > 14 days (2010 Schedule E, L.2 No.) (Rental for 90 days and personal use 10 days) Personal use > 14 days and rental > 14 days (2010 Schedule E, L.2 Yes.) (Rental for 80 days and personal use 20 days) VHD.18 51

27 Vacation Homes (No) (Skip to Slide 60.) No personal use and all rental 1. Why is a Bed & Breakfast reported on a Schedule C? (APCU 7days& significant services. Also used on a transient basis since APCU 30 days. See Reg T(e)(3)(viii), Ex. 4.) 2. Why Schedule E and what is the difference between: a. Renting toonetenantt t for an entire year; and b. Renting to 20 different groups for 120 days? 1) APCU = 6 days Not a rental activity, but still Schedule E and not Schedule C. Why? VHD Vacation Home (No) What schedule would you use for the following: 469 Only Sch. TorB Rental Act 1. Bed & Breakfast. (APCU 7 days & significant services. See Reg T(e)(3)(viii), Ex. 4.) C Yes No 2. Rent a Vacation Home to one tenant for the entire year. E No Yes 3. Rent a Vacation Home for 120 days to 20 different groups. E Yes No 4. Rent a Vacation Home for 160 days to 20 different groups. E No Yes VHD.18 53

28 Vacation Home (No) What schedule would you use for the following: 469 Only Sch. TorB Rental Act 5. Rent a houseboat on Lake Powell to Summer tourists. C Yes No 6. Lease construction equipment to a third party on a net lease. E No Yes 7. Operate a U Rent it Store. C Yes No VHD Look Out for this IRS Position A client owns a unit in the Hawaiian Hilton located in Hawaii. The client uses the unit for 20 days during the yearandthehawaiianhiltonrents the unit on days not used. For 2018, the Hawaiian Hilton rents the unit for $400 per day for 250 days and the average period of customer use is ten days. Is your client entitled to a $25,000 deduction for actively participating in a rental real estate activity? (See Reg T(e)(3)(viii), Ex. 4.) APCU > 7 days but APCU 30 days Not a rental activity if provide significant services Maid services are significant services if allocable cost 10% of daily rental. VHD.18 55

29 Look Out for this IRS Position (No) 469(i) allows up to $25,000 of losses from rental real estate activities in which the taxpayer actively participates. 1. Problem for vacation home owners: If average period of customer use (APCU) is 7 days or less, it is not a rental activity and the $25,000 exception does not apply. 2. Reg T(e)(3): An activity also is not a rental activity if the APCU is 30 days or less and significant personal services are provided by or on behalf of the owner of the property in connection with making the property available for use by customers. Typical services such as cleaning common areas, making routine repairs, providing security, and collecting trash do not count. VHD Look Out for this IRS Position (No) Significant personal services : consider all facts such as the frequency of the services, the type and amount of labor required, and the value of such services relative to the amount charged for the use of the property. Example in the regulations: 1. T operates a residential apartment hotel where APCU is more than 7 but less than 30 days. T provides maid and linen service at no additional charge, and the value of such services is less than 10% of the amount charged tenants. Here T is not providing significant personal services. Why 10%? No 10% rule is provided in the regulations or elsewhere. VHD.18 57

30 Look Out for this IRS Position (No) IRS in recent audits involving $25,000 exception where APCU is more than 7 days, but 30 days or less: 1. If personal services provided, such as maid service, and the allocable cost of maid service is at least 10% of the rent, the taxpayer is providing significant personal services. IRS relies on the example in the regs. 2. Then IRS does not need to fight about whether the taxpayer actively participates in the activity. If the 30-day rule applies, the activity is not a rental activity and 469(i) does not apply. 3. IRS is doing this where a taxpayer owns an interest in a hotel or resort room/suite, the hotel handles rentals, and APCU is more than 7 but less than 30 days. No basis for a 10% rule. But now what Schedule Schedule C or Schedule E? VHD Vacation Homes (No) What is the difference between a long-term rental and short-term rental for a vacation home? APCU > 7 days = Rental activity for 469 APCU 7 days = Not a rental activity for 469 What schedule would you use if aclient rented avacation home to one individual for the entire year versus renting the vacation home for 120 days to 20 different groups? Schedule E for both Why? No significant services. VHD.18 59

31 Definition of a Vacation Home Is a condo, a duplex, or a single family dwelling a Vacation Home? ANS: Yes - bed, bath and kitchen. Is a boat a Vacation Home? ANS: Yes Is a motor home a Vacation Home? (Is a motor home a mobile home?) ANS: Yes Is a fifth-wheel trailer a Vacation Home? ANS: Yes Is a mobile home a Vacation Home (Double-Wide or Air Stream Trailer)? ANS: Yes VHD Definition of a Vacation Home Is a motor home, a fifth-wheel trailer, or a mobile home the same as a mobile home which is used on a transient basis? (See 56(e).) Mention NYC, mobile home & 1982 What does transient mean? Does it mean with wheels, it is transient and w/o wheels, it is not transient? Is a pop-up camper a dwelling unit? (See Akers.) ANS: Yes. VHD.18 61

32 Definition of a Vacation Home (No) What schedule would you use if your client purchased an expensive motor home and leased the motor home to tourists during the summer? (Same with houseboat on Lake Powell.) Schedule C Not a rental activity (Why if APCU > 7 days?) Maintain, repair, insure, and pay the taxes (significant services) Can U take a 179 deduction? (ANS: Yes, and 100% bonus depreciation is also available in 2018.) VHD.18 62

33 Section 280A Vacation Home and Office in the Home VOGEL.SEM/VHD.18

34 Section 280A Vacation Home and Office in the Home Disallowance of Certain Expenses in Connection with Business Use of Home, Rental of Vacation Homes, Etc. Current through P.L (excluding P.L ) approved (a) General Rule.--Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. (b) Exception for Interest, Taxes, Casualty Losses, Etc. Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). (c) Exceptions for Certain Business or Rental Use; Limitation on Deductions for Such Use.-- (1) Certain Business Use.--Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis-- (A) as the principal place of business for any trade or business of the taxpayer, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A), the term "principal place of business" includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business. (2) Certain Storage Use.--Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer's trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business. (3) Rental Use.--Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)). (4) Use in Providing Day Care Services.-- (A) In General.--Subsection (a) shall not apply to any item to the extent that such item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer's trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves. (B) Licensing, Etc., Requirement. Subparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A)-- (i) has applied for (and such application has not been rejected), (ii) has been granted (and such granting has not been revoked), or (iii) is exempt from having, a license, certification, registration, or approval as a day care center or as a family or group day care home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of (C) Allocation Formula.--If a portion of the taxpayer's dwelling unit used for the purposes described in subparagraph (A) is not used exclusively for those purposes, the amount of the expenses attributable to that portion shall not exceed an amount which bears the same ratio to the total amount of the items allocable to such portion as the number of hours the portion is used for VOGEL.SEM/VHD.18

35 (d) such purposes bears to the number of hours the portion is available for use. (5) Limitation on Deductions.--In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of-- (A) the gross income derived from such use for the taxable year, over (B) the sum of-- (i) (ii) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year. Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year. (6) Treatment of Rental to Employer.--Paragraphs (1) and (3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer. Use as Residence.-- (1) In General.--For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of-- (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental. For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes. (2) Personal Use of Unit.--For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used-- (A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person; (B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or (C) by any individual (other than an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental. The Secretary shall prescribe regulations with respect to the circumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this paragraph, except that if the taxpayer is engaged in repair and maintenance on a substantially full time basis for any day, such authority shall not allow the Secretary to treat a dwelling unit as being used for personal use by the taxpayer on such day merely because other individuals who are on the premises on such day are not so engaged. (3) Rental to Family Member, Etc., for Use as Principal Residence.-- (A) In General.--A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person's principal residence. (B) Special Rules for Rental to Person Having Interest in Unit.-- (i) Rental must Be Pursuant to Shared Equity Financing Agreement.-- Subparagraph (A) shall apply to a rental to a person who has an interest in the dwelling unit only if such rental is pursuant to a shared equity financing agreement VOGEL.SEM/VHD.18

36 (ii) Determination of Fair Rental.--In the case of a rental pursuant to a shared equity financing agreement, fair rental shall be determined as of the time the agreement is entered into and by taking into account the occupant's qualified ownership interest. (C) Shared Equity Financing Agreement.--For purposes of this paragraph, the term "shared equity financing agreement" means an agreement under which-- (i) 2 or more persons acquire qualified ownership interests in a dwelling unit, and (ii) the person (or persons) holding 1 or more of such interests-- (I) is entitled to occupy the dwelling unit for use as a principal residence, and (II) is required to pay rent to 1 or more other persons holding qualified ownership interests in the dwelling unit. (D) Qualified Ownership Interest.--For purposes of this paragraph, the term "qualified ownership interest" means an undivided interest for more than 50 years in the entire dwelling unit and appurtenant land being acquired in the transaction to which the shared equity financing agreement relates. (4) Rental of Principal Residence.-- (A) In General.--For purposes of applying subsection (c)(5) to deductions allocable to a qualified rental period, a taxpayer shall not be considered to have used a dwelling unit for personal purposes for any day during the taxable year which occurs before or after a qualified rental period described in subparagraph (B)(i), or before a qualified rental period described in subparagraph (B)(ii), if with respect to such day such unit constitutes the principal residence (within the meaning of section 121) of the taxpayer. (B) Qualified Rental Period.--For purposes of subparagraph (A), the term "qualified rental period" means a consecutive period of-- (i) 12 or more months which begins or ends in such taxable year, or (ii) less than 12 months which begins in such taxable year and at the end of which such dwelling unit is sold or (e) (f) exchanged, and for which such unit is rented, or is held for rental, at a fair rental. Expenses Attributable to Rental.-- (1) In General.--In any case where a taxpayer who is an individual or an S corporation uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used. (2) Exception for Deductions Otherwise Allowable. This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented. Definitions and Special Rules.-- (1) Dwelling Unit Defined.--For purposes of this section-- (A) In General.--The term "dwelling unit" includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit. (B) Exception.--The term "dwelling unit" does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. (2) Personal Use by Shareholders of S Corporation. In the case of an S corporation, subparagraphs (A) and (B) of subsection (d)(2) shall be applied by substituting "any shareholder of the S corporation" for "the taxpayer" each place it appears. (3) Coordination with Section If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year-- (A) section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but (B) such year shall be taken into account as a taxable year for purposes of applying VOGEL.SEM/VHD.18