Partnership renting personal residence under 280A(g)

Technical topics regarding tax preparation.
#1
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A client that is always seeking interesting ways of tax benefit due to being in second highest marginal tax bracket sent me an article about using Sec. 280A(g) to allow their partnership to rent their residence for up to 14 days, and gain tax-free income. The article they sent is over 8 years old, but I did find another article on the subject written in 2021.

Article sent by client dated 2012: http://gedeonlawcpa.com/how-to-write-off-14000-to-hold-business-meetings-in-your-home/

2021 article I found: https://andersonadvisors.com/section-280a-deduction-explained/

This sounds like serious manipulation of the IRC and I do not agree with the authors' positions. My interpretation of 280A(g) 14 day rental rule means the taxpayer that theoretically rents their house to the partnership CANNOT occupy the residence, and thus trigger personal use, during any of the rented days, per Sec. 280A(d)(1).

So, if the taxpayer whose house would be rented still occupies and uses the home for personal purposes during the 14 days, they do not qualify as "fair rental days" since personal use still exists.

Not to mention the absurd rental value comparatives to renting a hotel ballroom, for example, for what is ultimately a three member partnership.

Thoughts? I think this is complete nonsense but curious if anyone else interprets 280A language the same way it is discussed in the linked articles, or if my interpretation is on track.
Last edited by CornerstoneCPA on 23-Mar-2021 10:19am, edited 1 time in total.
 

#2
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Thoughts?


You’re late to the game. People have been doing this forever.
This sounds like serious manipulation of the IRC and I do not agree with the authors' positions.


Why?

What’s the difference between renting your home for 13-days to your wholly-owned S-corp, for example, and renting it to some random person who wants to be close to the golf tournament that’s just outside your back gate?
 

#3
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The alternative for partner/shareholder meetings and company outings is renting a pretty expensive commercial property.

As long as its bona fide and fair market, it's an excellent planning tool (as you noted under IRC Sec 280A).
 

#4
JAD  
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allow their partnership to rent their residence for up to 14 days, and gain tax-free income

I think the bigger hurdle is making sure that this expense qualifies as a 162 expense for the partnership.
 

#5
migbike  
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It's known as the "Augusta Rule" because some Augusta politician got it written into the code to help people who were renting out their homes, pool houses, mother-in-law suites, etc. during the Masters Tournament.

I can't think of an example where the home wouldn't have at least some personal use during the rental. Presumably all of your personal items, furniture, etc., stay in the home during the rental period?
 

#6
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JAD wrote:
I think the bigger hurdle is making sure that this expense qualifies as a 162 expense for the partnership.


Right. Based on current facts and circumstances I am aware of, I fail to see how it can be justified for 162 purposes when, historically, they have held nearly all of their meetings via video conferencing. They have had perhaps a handful of in-person meetings since the partnership started in 2019. Even their actual client services are completed almost entirely virtually, and they do not meet with clients at any of their respective home offices (three home offices--two in SC and one in VA and each partner performs all partnership functions exclusively from their home offices). Though, I guess ordinary and reasonable can still be met even if not habitual by the partnership.
 

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I fail to see how it can be justified for 162 purposes when, historically, they have held nearly all of their meetings via video conferencing.

Oh man, you’re really going down a slippery slope here telling clients that their in-person office meetings, or special events, are unnecessary, so as to preclude a Sec 162 deduction. If this client fires you, don’t be surprised.

I knew a guy one time that bought a used business auto that cost $10k. He became successful, sold that car, and bought another used one for $20k. It was much nicer, but he really didn’t need it. There goes his deduction…
 

#8
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Jeff-Ohio, please keep your commentary constructive or simply stay out of the thread. You do not know the facts and circumstances I do, and calling 162 into question is valid and it is also my duty as their tax advisor and controller. There is a reason they asked me about it. What I say here vs. what I ultimately communicate to my clients is often quite different. More often than not, I cringe seeing your responses, anywhere, because of the tone and criticism you tend to have, even when they are not pertaining to my own input or questions.

As to 280A(g), I am familiar with it for rental income for special events or various other non-business purposes, but have not had to consider it in terms of a partnership or corporation renting the residence of a partner/shareholder. I utilize skepticism until I become reasonably convinced that a certain position has validity. Anyone here that fails to do so is not doing their job.
 

#9
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Jeff-Ohio, please keep your commentary constructive or simply stay out of the thread.

Commentary isn’t constructive or unconstructive. It is a recognition of a simple reality: A CPA tells his clients that in-person business meetings are unnecessary and won’t produce a tax deduction. I can see an accountant getting fired over this.

You do not know the facts and circumstances I do

There are no facts and circumstances to know here. Your analysis is highly unpersuasive, seeing that it is based on “history,” as if that sets the benchmark for a current “ordinary and necessary” test. I gave a simply example, about the car, about how backwards that thinking is. Also, we’ve upgraded our office space, and our fax machine, and a plethora of other things over the years, even though the old ones worked just fine. I guess all that’s non-deductible because it was unnecessary, as per the historical benchmark.

More often than not, I cringe seeing your responses, anywhere, because of the tone and criticism you tend to have, even when they are not pertaining to my own input or questions.


Please keep your comments constructive! But seriously, you don’t have to read my responses. Just delete me, or whatever it’s called in the Forum. And I cringed (but not really) when you I saw your initial post. Especially the part about how a guy paying fair rent for the use of property is some type of Tax Code manipulation. Actually, you said “serious” manipulation. I guess there’s also serious manipulation when a guy buys a $25 pen. What also made me cringe (but not really) is that you’ve never heard of this strategy before. It’s been around for decades.

In my opinion, this is a clear case of a practitioner hearing about a strategy for the first time, getting a certain bad feeling about it, and then finding a way to support the advice such that said advice aligns with the bad feeling.

Please note that my comments were directed at your analysis and potential advice, not at you.
 

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Interestingly enough, I have directly spoken with several 40+ year tax practitioners today and they raised same concerns I have expressed--one is a sole practitioner, the others are tax partners of larger regional firms. One even blatantly said "I question if this is actually allowed within overall confines of the IRC based on facts and circumstances for such a small partnership."

Well, upon further research (proper approach for our industry), my conclusion is it CAN BE legal based on SPECIFIC facts and circumstances--but, it is not an across the board application. Guess my questions and skepticism are not so out of line, after all. :roll:

As to my correspondence with my client, I presented IRC facts and then various questions for them to contemplate without definitively saying anything or making accusations that it is not acceptable under 280A(g) or 162. That is the proper approach, including approaching everything with a reasonable dose of skepticism vs. accepting it as a standard practice dating back decades. :roll: :roll: :roll:
 

#11
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Guess my questions and skepticism are not so out of line, after all.


You had a bit more than skepticism. Some of your words were:

This sounds like serious manipulation

I do not agree with the authors' positions.

Not to mention the absurd rental value comparatives

I think this is complete nonsense

I would say these words go beyond mere “doubt,” which is what skepticism means.

vs. accepting it as a standard practice dating back decades.

Maybe you’re misunderstanding: We accept it as standard practice when it is carried out in a bona fide way. You had a big issue with the “concept,” labeling it “serious manipulation” and “complete nonsense,” as if it could not be done even with a bona fide arrangement. What I had an issue with is that one-sided characterization.

This strategy has indeed been around for decades. We also know that the deduction is governed by Sec 162. That is a given and is very basic. If your clients have bona-fide meetings at their homes, that are documented (i.e. proven business use), and fair rent is paid, then we have a valid Rent deduction. No one is saying to just cut a big check for some inflated value when there are no meetings. Neither linked article remotely suggests that. Such a suggestion would be like saying you can deduct the costs of your business auto when you don’t use it at all for business. No one is saying that and no one has said that.

One even blatantly said "I question if this is actually allowed within overall confines of the IRC based on facts and circumstances for such a small partnership."

Good for him. He can question it all day long. The overall confines of the IRC will allow it if there’s no funny business, like inflated Rents and no meetings/gatherings. The rent deduction gets tested just like any other rent deduction. And on the income side, 280A says what it says.

without definitively saying anything or making accusations that it is not acceptable under 280A(g) or 162. That is the proper approach

That, I totally agree with, wholeheartedly.
 

#12
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What is the take on the Augusta rule combined with a home office (accountable plan)? I cannot find authority on taking them together. It does seem like a double dip.
 

#13
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I think what you're referring to could be interpreted in at least two different ways. You'll have to expand in detail.
 

#14
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If a client works from home (no other office) and is reimbursed by her S corp for her use of the home office, can she also rent the home to her S Corp under the Augusta rule?

If a client has an office but uses the home office for administrative tasks, can he/she be reimbursed for the home office and rent to their S Corp under the Augusta rule?
 

#15
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Sure, why not? Although it would be strange given the fact pattern.

I'm assuming you mean renting the entire house to throw something like an employee party. Rare that one would have a home office and employees.
 

#16
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@cornerstonetax I think everyone is entitled to their opinion and I do not think you are out of line for posing the question. However, as the attorney that created that content for that second article you linked I would like to first note that the strategy is in relation to a Corporation as the renter and not a partnership. Also Anderson Advisors, the company I work for, has been using this strategy since 1999 and in the exceedingly rare case where this has been audited we have successfully defended it.

This T.C. Memo has a pretty good description of the elements required to use this strategy: https://www.bradfordtaxinstitute.com/En ... 98-125.pdf

Anyone reading these and interested in learning more can sign up for one of our free one-day classes.
https://andersonadvisors.com/

I would also invite anyone interested in a wide variety of subjects to like and subscribe to my YouTube Channel. https://www.youtube.com/channel/UCX3YlQ ... 2IBtz9MtLg

Thanks everyone.
 

#17
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CarlZ wrote: However, as the attorney that created that content for that second article you linked I would like to first note that the strategy is in relation to a Corporation as the renter and not a partnership.

Wonderful thread! Sooo... is there an issue with a partnership renting in this context? I see many articles only written for C and S corps.
 


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