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Vacation rental depreciation life

Technical topics regarding tax preparation.
#1
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I'm still confused about the definition of residential rental vs. commercial rental for purposes of depreciation.

Client owns a vacation beach house that he rents out. Average stay for each tenant is 8 days. Client provides cleaning and linens but no other services.

Any thoughts on the useful life for depreciation - 27.5 years vs 39 years?

Thanks in advance for your thoughts on this.
 

#2
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I don't think we have enough facts to answer this question.

For purposes of MACRS depreciation, IRC §168(e)(2)(A)(I) defines "residential rental property" as "any building or structure if 80 percent of the gross rental income" is rental income from dwelling units. Under IRC §168(e)(2)(A)(ii), a "dwelling unit" means a house or apartment used to provide living accommodations, but does not include a unit in a hotel, motel or other establishment where more than half of the units are used on a transient basis.

So, it seems that you need to look at the factual situation involving your client's rental in order to determine if it fits the definition of "residential rental property." If it does, then it's 27.5-year recovery property. If it doesn't, then it's 39-year recovery property.
 

#3
makbo  
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What we don't yet have here is a definition of "used on a transient basis", and whether "more than half of the units" means there must be at least two.

I would not consider a single-family house in a residential neighborhood (if that is what it is), rented as a single dwelling unit, to be a hotel or motel, so I'd use 27.5-year recovery.

[edit - subsequent posts in this thread cast doubt on this interpretation, and as they have cites and I don't, I defer to others]
Last edited by makbo on 10-Jul-2015 5:22pm, edited 1 time in total.
 

#4
Coddington  
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There's a definition of transient:

Former § 1.167(k)-3(c)(2) provided that the term dwelling unit does not include any unit
in a hotel, motel, inn, or other establishment more than one-half of the dwelling units in
which are used on a transient basis. A dwelling unit is used on a transient basis if for
more than one-half of the days in which the unit is occupied on a rental basis during the
taxpayer's taxable year it is occupied by a tenant or series of tenants each of whom
occupies the unit for less than 30 days.


CCA 201147025.

Given the average eight-day stay, I'd say it looks more like 39-year property.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com
 

#5
Nilodop  
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One half of the units, one half of the days, new, old. If there is one unit, and it is used on a transient basis, the arithmetic comes out to !00%. And the language "other establishment" is additional to "hotel, motel", and is broader than, say, "other similar establishment".
 

#6
WEISSEA  
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"Client owns a vacation beach house that he rents out. "

Does the client use the vacation property even for 1 day during the year?
 

#7
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Also, see Treas. Reg. §1.48-1(h)(2)(ii):

    (ii) Property used by a hotel or motel.—Property used by a hotel, motel, inn, or other similar establishment, in connection with the trade or business of furnishing lodging shall not be considered as property which is used predominantly to furnish lodging or predominantly in connection with the furnishing of lodging, provided that the predominant portion of the living accommodations in the hotel, motel, etc., is used by transients during the taxable year. For purposes of the preceding sentence, the term “predominant portion” means “more than one-half”. Thus, if more than one-half of the living quarters of a hotel, motel, inn, or other similar establishment is used during the taxable year to accommodate tenants on a transient basis, none of the property used by such hotel, motel, etc., in the trade or business of furnishing lodging shall be considered as property which is used predominantly to furnish lodging or predominantly in connection with the furnishing of lodging. Accommodations shall be considered used on a transient basis if the rental period is normally less than 30 days.
 

#8
Nilodop  
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(ii) Property used by a hotel or motel.—Property used by a hotel, motel, inn, or other similar establishment, Thereby confirming, perhaps, that the language "other establishment" is additional to "hotel, motel", and is broader than, say, "other similar establishment".
 

#9
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Actually, it's a single family home, and there is no personal use.
 

#10
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IRC §168(e)(2)(A)(ii) uses the phrase “hotel, motel, or other establishment,” which, as Nilodop points out, is broader than “hotel, motel, or other similar establishment.” So the dwelling unit here doesn’t need to be similar to a hotel or motel.
 

#11
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GREAT discussion! This is really helpful. We do have a lot of such situations here in MD near the ocean. It does look like 39 year property. Although makbo makes a good point that all of the rules seem to refer to multi-unit buildings, rather than single family buildings.
 

#12
HowardS  
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This thread has been silent for awhile so I'd like to do a "semi-hijack" and ask a couple of related questions.
Referencing IRC 1.469-1T(e)(3)(ii):
1) How are partial days treated? Checkin Sat afternoon, checkout next Sat morning...7 days or 8 days?
2) Services provided by owner or provided by others hired by a rental's management company. Are both considered "personal services"?
3) Cleaning and changing sheets between rentals only. Significant or extraordinary?
4) Are we saying in this discussion that 39 year property makes this a non-rental, thus a schedule C activity?

Thanks. The Passive Loss ATG and a couple of very good discussions on Taxalmanac (including insights by the late and great Riley2) are helpful but I think these issues are not clear.
I suffer from depreciation.
 

#13
makbo  
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" Are we saying in this discussion that 39 year property makes this a non-rental, "

Rental comes in two flavors, residential (27.5 yrs) and commercial (non-residential), 39 years. Still both real property rentals.
 

#14
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HowardS - Riley2 was a giant, wasn't he? On your questions 3 and 4, I believe that the property life being 39 years rather than 27.5 for depreciation purposes is based on whether the use is "transient" and doesn't govern whether the income needs to be reported on schedule C. Instead, reporting on schedule C is governed by whether significant services are rendered to the occupant, regardless of the length of their stay, based on the regs for IRC 1402 relating to SE tax. It looks like providing maid services for the occupants would be significant, but cleaning and laundering between rentals to prepare for the next occupant would not be.

Do you agree with my take on that?
 

#15
Frankly  
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I would agree that providing services to the "renter-guest" during the course of their rental period would constitute a business activity reported on Sched C. Cleaning up after the "renter-guest" departs and getting the premises ready for the next renter including washing the sheets does not rise to the level of providing services.
 

#16
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I can see that there's a need for a book "The Income Taxation of Weekly and Other Rentals Near the Beach and Other Vacation Places" and I would be happy to confer casually over a PBR, or two, or more, as soon as I get back from the beach, where I take my own sheets; ya jes never know.
 

#17
Nilodop  
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You take sheets to the beach? In your Speedo?
 

#18
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Harry - can we agree to disagree - with the greatest respect my favoring Single Malt rather than the PBR?
 

#19
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Agree to disagree? Of course. I agree with everything, especially disagreeing. Except, of course, the statutory definition of "trade or business." :lol: :oops: 8-) :roll: :twisted:
 

#20
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Sometimes in my Speedo, Nelly, sometimes not.
 


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