Room Rental and vacation home rules - a Poll.

I started a thread last week regarding how to get my program to apply the vacation home rules to a room rented in taxpayers primary home. I received many responses and it seems as if there is not a consensus regarding if a loss may be claimed in this situation.

Taxpayer owns a home and has a roommate (not an Airbnb situation but rather long-term). Roommate pays fair market rent for room. Home is 1000 sq. ft. and room rented is 300 sq. ft. Common areas all shared. Taking 30% of expenses including depreciation results in a loss. Can this loss be claimed or must it be adjusted to zero?



Here is the previous discussion:

viewtopic.php?f=8&t=17062

Well, I wouldn't take depreciation. Can't figure how you'd get to a loss.

Good point, bad example. Lets change the roommates area to 30%. Thanks for pointing that out.

Can this loss be claimed or must it be adjusted to zero?

How would you interpret IRC Sec 280A(c)(5) in the context of your client's situation?

I think it means we pro-rate expenses based on sq. footage. If, after subtracting the pro-rated amount of mortgage interest and property tax from the rental income there is a loss, we take the loss. If there is a gain, we use the pro-rated amount of operating expenses to bring it down to zero. If there is still a gain after deducting all the pro-rated operating costs we use the pro-rated amount of depreciation to bring us down to zero. Everything we do not take carries over into next year.

How did I do? Thanks for the question.

If it is a true landlord / renter situation where there is a profit motive then there is no reason not to take the loss.

Assuming here that the rented room is used exclusively by the renter and he is a renter, not a room mate. Schedule E with 365 fair rental days and zero personal use days.

On the other hand, for a room mate who is just paying his or her share of the expenses of keeping up the dwelling there would be no Schedule E at all. Just some income on the "other income" line (is it line 8 now? still getting used to the new form) of the 1040.

Tenletters -so how would you answer Man's question?

How would you interpret IRC Sec 280A(c)(5) in the context of your client's situation?

I am not talking about the case of a friend helping out with bills but rather a true landlord - tenant situation at fair market rent as stated above.

If, after subtracting the pro-rated amount of mortgage interest and property tax from the rental income there is a loss, we take the loss. If there is a gain, we use the pro-rated amount of operating expenses to bring it down to zero. If there is still a gain after deducting all the pro-rated operating costs we use the pro-rated amount of depreciation to bring us down to zero. Everything we do not take carries over into next year.

We're in agreement.

This is the way I interpret 280A's application to "house-hacking" which has become a popular way to "invest" in real estate in the past decade or so. That is, someone buys a single-family property, lives in one of the rooms, and rents out the remaining rooms on traditional, long-term lease.

The exception would be a Bed and Breakfast like establishment if we filter Sec 280A(c)(5) through Sec 280A(f)(1)(B).

And 280A(e) certainly applies as was stated in the other thread.

On the other hand, for a room mate who is just paying his or her share of the expenses of keeping up the dwelling there would be no Schedule E at all. Just some income on the "other income" line (is it line 8 now? still getting used to the new form) of the 1040.

Not sure I agree with this...

A below fair market rental to family and a not for profit rental would generally be reflected as gross rents on Sch 1 and no deductions. Things I'd look at here would be evidence of a rental agreement (big one) and what is fair market. In absence of a written agreement, we should try to understand the verbal agreement between the parties (and perhaps encourage them to memorialize it on paper).

If it is a mere cost sharing arrangement, you would report gross income to the person that merely collects and remits the money?

Can this loss be claimed or must it be adjusted to zero?

How would you interpret IRC Sec 280A(c)(5) in the context of your client's situation?

Here is the Code Section:
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)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
(ii)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.

In the example - dwelling unit (the bedroom) is not used by taxpayer, its rented on a long-term basis - correct?
I don't think this section applies.

In the example - dwelling unit (the bedroom) is not used by taxpayer, its rented on a long-term basis - correct?
I don't think this section applies.

Are you using the relevant definition of "dwelling unit"? You know, perhaps the one that's in IRC Sec 280A?

In my reference material, it has an example of a house with one bedroom rented to sister at less than FMV and one bedroom rented to unrelated party at FMV, with owner using a bedroom. Everyone has use of all of the common areas of the house. Says that the room rented at FMV is treated as NOT being included in the dwelling unit and that an allocable share of all expenses is fully allowable against rental income, subject to passive loss limitations. Shows the loss being reported on Schedule E. However, the common area, owner's bedroom and the room rented to sister are a single dwelling subject to the rental limitations. The rent received from sister is reduced to -0- by any allowable expenses. No loss allowed for her rental portion.

I agree with the above!

In my reference material...Says that the room rented at FMV is treated as NOT being included in the dwelling unit and that an allocable share of all expenses is fully allowable against rental income, subject to passive loss limitations. Shows the loss being reported on Schedule E.

That's great, but how do you reconcile that to the authoritative guidance which has already been posted, assuming we are talking traditional, long-term rentals?

In other words, please prove to me, using the code, regs, case law, rev procs, rulings, etc, that we actually get to the treatment your reference material suggests.

If it is a true landlord / renter situation where there is a profit motive then there is no reason not to take the loss.

Assuming here that the rented room is used exclusively by the renter and he is a renter, not a room mate. Schedule E with 365 fair rental days and zero personal use days.

The plain language of Sec 280A(a) contradicts those ideas. The only out you might have (quite doubtfully) is the hotel exception in 280A(f)(1)(B).

It seems that the OP is proposing that 280A doesn’t apply to room rentals inside of one’s residence. That is definitely not right. This type of arrangement fits squarely into 280A.

There are many cases surrounding this issue and most of them involve Bed & Breakfast type establishments. There is also a case called Morcos which gets into the nitty gritty details.

Bedroom rented to unrelated party are treated as NOT being included in dwelling unit, Prop. Reg. 1.280A-1(c)(2).
Sister's room and common areas are a single dwelling subject to rental limits of IRC Sec. 280A.
Also see the Morcos case that Jeff referenced above.

Agree with Jeff-Ohio. You cannot deduct a rental loss on a room rental. Each day of room rental is both a personal use day and a rental day.

So for AirBnB temporary rentals, same rules would apply. NO?

AirBnB hosts rent rooms, entire houses or separate dwellings. Some provide significant services. No one rule fits all.

Bedroom rented to unrelated party are treated as NOT being included in dwelling unit, Prop. Reg. 1.280A-1(c)(2).

That regulation relates to the Hotel Exception. The Tax Court refused to hold that this language in the Regulation (the part about long-term boarders):

Thus, this exception may apply to a portion of a home used to furnish lodging to tourists or to long-term boarders such as students.

…is consistent with the related statutory provision [280A(f)(1)(B)] as well as the intent of 280A in general. It is also inconsistent with the first sentence in the cited Regulation:

Notwithstanding the provisions of paragraph (c)(1) of this section, the term “dwelling unit” does not include any unit or portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment.

So, we have a prop reg that speaks to long-term boarders. But the IRS didn’t agree with it in its own litigating position. The taxpayer, on the other hand, relied upon it. In the end, we simply have two different positions. IRS wins. This case is pretty old, so it’s somewhat of a mystery why Seaside’s reference materials would include an example that wouldn’t pass muster if challenged.

Don't have time to really research this, but in Morcos the court found that the rental of the third floor was not a business, but was an arrangement to offset owner's living expenses. There is an exception that says the dwelling unit limitations do not apply to that portion of a property used exclusively as a hotel, motel or similar establishment. Property partially used as a personal residence will qualify for the exception if two tests are met:
1. the property is regularly available for rent by paying customers
2. no person having an interest in the property uses the business portion as a residence during the year.

My reference material states that if the rental is for a school year, or a short-term rental, it may differentiate it from the Morcos decision.