Recommended By: Tom Byers
The Tax Court recently decided a case that provides guidance to taxpayers who own vacation homes. The deductibility of expenses related to such properties is limited when the owner taxpayer/owner has personal use of the property. The case helps define what can qualify as a “work day” rather than a personal use day, and therefore maximize the business use and deductions related to the property. Specifically, they address when travel days can be work days under the rules.
Mark A. Van Malssen and Patricia D. Kiley, TC Memo 2014-236
The Tax Court has held that, because of the taxpayers’ personal use of rental real estate, a
condo, deductions for rental real estate losses were limited by Code Sec. 280A for two tax
years. It also resolved a dispute between the parties as to the proper business use percentage
during a third year.
Facts. In March 2007, Taxpayers, a married couple, purchased a vacation condo in South
Carolina. They used it for 81 days in 2008, 59 days in 2009, and 45 days in 2010. Husband’s
brother used it for seven days in 2008. They also rented it to vacationers. The average rental
period was approximately 10 days in 2008, eight days in 2009, and seven days in 2010.
Taxpayers retained Dieter Co., a rental management company, to provide sales and
management services, including booking rentals and cleaning and maintaining the unit
between rentals. Dieter Co. spent 57 hours in 2008, 63 hours in 2009, and 69 hours in 2010
performing services with respect to the condo.
Taxpayers determined at the time of purchase that the condo needed remodeling and repairs.
Throughout the years at issue, Husband made the 350-mile trip from their home to the condo
several times to remodel and repair it. In 2008, he took 12 trips to the condo of varying lengths
during which he performed repairs and maintenance for some or all of the trip, as follows:
(Trip 1) There for 14 days, worked for all.
(Trip 2) There for five days, worked for all.
(Trip 3) There for 11 days, worked for nine.
(Trip 4) There for six days, worked for three.
(Trip 5) There for five days, worked for one.
(Trip 6) There for one day, worked that day.
(Trip 7) There for six days, worked for all.
(Trip 8) There for five days, worked for four.
(Trip 9) There for three days, worked for all.
(Trip 10) There for four days, worked for two.
(Trip 11) There for three days, worked for all.
(Trip 12) There for seven days, worked five.
The opinion also provides details as to the duration of his 2009 and 2010 trips and the number
of days he worked during each trip. In addition, it gives details as to the work he performed
during the trips. For example, at times he fixed things himself. During other trips, he met with
Taxpayers timely filed Forms 1040 for 2008, 2009, and 2010. They reported income from the
rental of the condo on Schedules E, Supplemental Income and Loss, of $11,702 and $11,130
for 2008 and 2009, respectively. For 2010, they reported income from the rental of the condo
on Schedule C, Profit or Loss From Business, of $18,015. They reported expenses related to
the rental of their condominium of $77,932, $67,429, and $64,003, for 2008, 2009, and 2010,
Issues before the Court. The issues for consideration were (1) whether Taxpayers’ deductions
for rental real estate losses for 2008 and 2010 were limited by Code Sec. 280A, and (2) to
what extent their rental real estate loss deduction for 2009 was limited by Code Sec. 280A.
Background. Where an individual owns a vacation home or a dwelling unit and uses it for both
personal and rental purposes, deduction of expenses is limited, except for those expenses
which are deductible without regard to business use of the property—e.g., mortgage interest,
property taxes and casualty losses. (Code Sec. 280A)
The owner’s personal use of the home (or portion of it) for even one day in the tax year triggers
these “vacation home” limits. (Code Sec. 280A(e)(1))
For any tax year in which the owner uses the (rented) vacation home or other dwelling unit for
personal purposes, or rents it out for less than a fair rental, the owner’s deduction for
maintenance, utilities, depreciation, etc., can’t exceed the percentage of those total expenses
for the year “attributable” to the rental period. (Code Sec. 280A(e)(1)) If a taxpayer who rents
out a dwelling unit also uses it as a residence, the deductions for business use (i.e., rental) of
the home (other than otherwise deductible expenses, such as mortgage interest and real
estate taxes) are limited to net income from the business. (Code Sec. 280A(c)(5))
A home is used as a residence in any tax year in which the owner’s use of the unit (or a portion
of it) for personal purposes exceeds the longer of (1) 14 days, or (2) 10% of the period of rental
use. (Code Sec. 280A(d)(1))
In general, if a taxpayer uses a dwelling unit for personal purposes for any part of a day, that
day is counted as a personal use day. (Code Sec. 280A(d)(2)) Pursuant to Code Sec. 280A(d)
(2), if the taxpayer is engaged in repair and maintenance of the residence on a substantially
full-time basis for any day, such use will not constitute personal use of the residence. Personal
use also includes use by certain relatives under Code Sec. 267(c)(4) including a brother of the
taxpayer. (Code Sec. 280A(d)(2)(A))
Disputes involving tax years 2008 and 2010. The primary factual issue the Tax Court had to
consider was the number of personal use days within the meaning of Code Sec. 280A(d)(2)
that the condo was used during 2008 and 2010. Taxpayers conceded that they personally used
the condo for 14 days during both 2008 and 2010. IRS said their use exceeded 14 days and
that their rental real estate losses for 2008 and 2010 were therefore limited by Code Sec.
The parties disputed how to characterize Husband’s brother’s use of the condominium for
seven days in 2008 and how to characterize the days Husband spent traveling to the
condominium in both 2008 and 2010.
With respect to the use by Husband’s brother, the Tax Court said that the facts and
circumstances did not indicate that it was used as his principal residence. It found that the
Taxpayers failed to carry their burden of establishing that the brother paid fair rental value to
use the condominium as his principal residence as they contended but did not substantiate
with documentation. Therefore, the seven days used by the brother were found to be
attributable to Taxpayers as personal use days for purposes of Code Sec. 280A(d)(2).
Looking at legislative history, the Tax Court concluded that since Congress did not intend for
days spent primarily repairing and maintaining the vacation home to count as personal use
days, days spent traveling to the site where the work is to be performed should not count
either. Since this legislation was enacted in response to the concern that taxpayers were
disguising personal use as business use, travel days will only escape classification as personal
use days if the principal purpose of the trip as a whole is to perform repairs and maintenance.
Then the Tax Court found that Taxpayers personally used the condo for a total of 24 days in
2008 and for a total of 16 days in 2010. It calculated the total number of personal use days for
each year by excluding the days spent traveling where the primary purpose was to perform
repairs and maintenance and by including the 14 days that Taxpayers conceded. For 2008, it
also included the seven days used by the brother. Therefore, it found that the limitations of
Code Sec. 280A applied for both 2008 and 2010.
Findings for 2009. Taxpayers conceded, that in 2009, their condominium was a residence, but
they disputed the calculation of their rental use percentage. The Tax Court resolved the dispute
in a way that was not quite as good for the taxpayers as they had contended but not nearly as
bad for them as IRS had asserted
Thomas A. Byers, CPA is a Director in the Tax Department of Ellin & Tucker and heads the firm’s Estate Tax Planning and Compliance Group. In addition to working with clients to advise them on tax ramifications of business transactions, he is also responsible for helping clients define their personal and estate tax goals. Tom also develops plans to assist clients in achieving their goals related to building and transferring wealth.