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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22733
Experience:  Taxes, Immigration, Labor Relations
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Hello, Im trying to prepare a tax return for a family

Resolved Question:

Hello,

I'm trying to prepare a tax return for a family member that rents out her 'Vacation Home"
and have the following questions:

Facts: Home was rented in 2012 for 35 days
Home was used by family for 88 days
Home was unused the rest of the year -242 days (vacant)

Questions:

How do I allocate the yearly tax and insurance costs?

Is the factor of 242/365 of the total of both bills NOT part of the any calculation for purposes of determining the Income and Expenses of the yearly rental and personal use on Schedule E. IRS Publication 527 does clearly discuss this.

The taxpayer is NOT itemizing deductions and instead taking the standard deduction and does not the need the tax expense deduction. Do you know of any good reference material that shows examples of this concept?

Also, are other expenses that fall outside the rental and use period of time allowed to be part of the Schdule E, or are they deemed to be personal and not deductible in nature?
Note that here was no interest expense paid in the tax year to contend with on the return.

Thanks much

John
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to our site!


When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
According to IRS method - you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. So the factor for rental use in your example would be 35 / (35 + 88) = 28.5%
The fact of itemizing or not is irrelevant for that deduction.
However - as you likely know - there is another allocation method which is based on the Tax Court ruling - so the factor for rental use in your example would be 35 / 365 = 9.6%. That allocation may be used ONLY to real estate taxes and home mortgage interest. All other expenses must be allocated using the first method.
However the Tax Court method would provide less deduction in your situation. So using this method might benefit if you itemize.
There are no there allowed allocation methods.

Customer:

Lev,

Lev :

Hi and welcome to our service.

Customer:

Lev...thanks for your response

Customer:

Lev..........thanks for responding to my questions.. I follow you to a point but still need to know the following:

Lev :

Please proceed..

Customer:

Lev, ...thanks for responding. Still need to know the following: There are expenses that are paid for the 264 days of the year that the property was NOT utilized by family members or renters.......Lawn services, electric, INSURANCE, PROPERTY TAXES, telephone, plumber costs to open and close the property, minimum water and cable connection charges, etc. Basic maintenance costs!! Are any of these costs in your opinion able to be added to the costs that are clearly incurred during the time that the property is rented (35 days) or used by family members (88 days)? Have you every had any audits on this issue? Thanks John

Lev :

I had no audit experience specifically for vacation rentals.
However as allocation method related to repairs, maintenance, depreciation and other rent-related expenses - the IRS clear indicates to use an allocation formula based on the percentage relationship between the number of days the property is rented and the total number of days the property is used, including personal-use days.
Requirements to use that allocation are based on the fact - the property that has been used by the taxpayer for personal purposes for more than 14 days during the tax year OR more than 10% of the number of days the home is rented at a fair rental value - and your example satisfies that test - so the IRS allocation method is allowed.

Customer:

Hello....I'm on line to answer any questions you have

Lev :

John - are you able to see my post above? Or you want me to switch to Q&A mode?

Customer:

Lev,

Customer:

Lev, Did you receive my questions responding to your initial response to me?

Lev :

I feel that we have chat communication issues... Will change to Q&A mode. Please refresh your screen.

Expert:  Lev replied 11 months ago.
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Expert:  Lev replied 11 months ago.
John,

I had no audit experience specifically for vacation rentals.
However as allocation method related to repairs, maintenance, depreciation and other rent-related expenses - the IRS clear indicates to use an allocation formula based on the percentage relationship between the number of days the property is rented and the total number of days the property is used, including personal-use days.
Requirements to use that allocation are based on the fact - the property that has been used by the taxpayer for personal purposes for more than 14 days during the tax year OR more than 10% of the number of days the home is rented at a fair rental value - and your example satisfies that test - so the IRS allocation method is allowed.

The reason for that - expenses during the period he property was NOT utilized by family members or renters - are not clear personal and not clear rental - but because they are related to the property which was used as rental - a part of such expenses might be allocated as rental related - so the issue is what allocation method to use as we discussed above.
Customer: replied 11 months ago.

Lev, If I understand what you are saying, I can allocate for example the entire yearly insurance bill, in my case $1500?


 


$1500 x (35/123days) rental portion and (88/123days) personal portion


 


Same would apply to lawn service????


 


Am I on the right track?


 


John

Expert:  Lev replied 11 months ago.
Hi John,

Your understanding is correct - the entire annual expenses may be allocated between rental and personal use.
If you are using IRS allocation method - you are correctly identified (35/123 days) as rental portion and (88/123 days) as personal portion.

You may use the same allocation for ALL expenses related to that property which are not specifically for rental - including lawn service fees.
If you have specifically rental expenses - for instance if you pay referral fees for finding renters - these are 100% rental expenses.

But otherwise - you are correct.
Customer: replied 11 months ago.


Thanks Lev.............Good Job!

Expert:  Lev replied 11 months ago.
Please pay attention that there is another allocation method - so-called "court method" which is based on the Tax Court ruling.
That allocation may be used ONLY to real estate taxes and home mortgage interest. All other expenses must be allocated using the first method.
If the taxpayer itemized - the court method allows to allocate larger portion to deductible personal expenses that are claimed on schedule A.
That might be beneficial because of the limit on deducting vacation rental losses.
However - if the taxpayer choose to use the court method - that method must be used for all years the property are rented - we may not change the allocation method if it is already established.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22733
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Customer: replied 11 months ago.


Lev-


 


Thanks for taking the time out to provide me with this additional information . Have a great weekend!


 


John

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