Chapter 9
Rental Activities

Rental Property - Schedule E
o    Business if significant services provided or equipment rental - Schedule C

Rental Property
o    Rent received
o    Expenses paid by the tenant
o    Tenant labor
o    Customary or usual for taxpayer's business
o    Travel (standard mileage rate)
o    Meals
o    General Repairs & Maintenance
o    Expenses paid by tenant
o    Tenant labor
o    Depreciation - MACRS
Personal property
Appliances, carpets, furniture  - 5 years
NO IRC §179 expense election allowed
Building
Residential - 27 ½ years
Non-residential - 39 years
Basis - your cost + improvements
     for conversion of personal residence to rental is the lesser of cost or FMV as of date of conversion

Special Rules When Only Part of the Property Is Rented
Sometimes the taxpayer rents only part of the property. When this is the case,

Rental of Vacation Homes
o    Classification depends on number of days rented compared to number of days of personal use
o    Rental Only Use;
o    Personal Only Use;
o    Personal/Rental Use
o    Property used for < 15 days for personal purposes
o    Personal use defined as
Recreational use by taxpayer & family or any other person who has an interest in it
Rented at less than fair rental price
Vacation rental swap
Donated days to a charitable organization
o    Personal use is NOT applicable when you repair or maintain the property while you are there
o    Rented for < 15 days
o    None of rental income includible in gross income
o    No deduction allowed for rental expenses
o    Used for Personal Use
     > 14 days, or 10% of rental days
o    Expenses only deductible to extent of rental income  - can't deduct a loss
If expense would have been incurred for the sole purpose of renting the property, it is 100% deductible
Otherwise it must be allocated amongst rental and personal use
Pecking order - offset rental income by expenses in this order
Direct expenses
Mortgage interest and property taxes - allocated
All other expenses - allocated
Depreciation - allocated
o    How you determine the allocation is the subject of substantial litigation.
IRS Method
Based on the number of days of rental use to the total number of days used (personal + days rented out)
Tax Court Method - 9th & 10th District
Based on the number of days of rental use to the number of days in the year (365) for interest & taxes only, use IRS method for other expenses
o    Loss may be carried forward
o    How would you advise a taxpayer how to avoid this situation?

At-Risk Rules
    The at-risk rules limit a taxpayer's loss to the amount the taxpayer could actually lose from an activity. This is known as the    amount the taxpayer is "at-risk."
Definitions
o    a trade or business in which the taxpayer does not materially participate
o    rental activities
o    limited partnerships

Passive Activity Losses
o    The new property owner cannot be the taxpayer's sibling, ancestor, or descendent.

$25,000 Special Deduction for Active Participants for Rental Loss

Rental Real Estate Professional
o    Not a passive activity
o    Can report a loss
o    Qualifications
More than 50% of taxpayer's personal service is performed in real property trades or businesses AND
The taxpayer performs more than 750 hours of service in the real property trade or business in which he claims material participation
o    Must attach a statement to the tax return to make this election

Partnerships & S-Corporations
End of Chapter 9