Tax Case 3
Attn: Dr. Ott
In this case, my group members represented the side of the taxpayer. One of the main issues in this case is whether or not Rex and Agnes Harrell should be able to make deductions in excess of rental income on their beach house. This deduction depends on if the 14-day personal use provision was exceeded. If the 14-day provision was exceeded than income should be limited to rental income as the ISR decided in this case. However, we have determined that the Harrell’s have not violated the 14-day provision and should therefore be allowed deductions for rental expenses exceeding rental income.
The Harrell’s purchased a beach house to use occasionally for recreational purposes, but also to rent it out. The house was in need of significant repairs so the couple decided to make the repairs themselves rather than hiring a contractor. Rex had taken advanced courses in woodwork at a local community college and he applied those skills in his maintenance work. The log maintained by the Harrell’s showed that the couple occupied the house for 38 days and rented it out for 49 days. On 24 of the 38 days occupied, one or both of them were actively working on the beach house. On the days they were working on the beach house they sometimes still had time for fun with their two teenage children. Some days they would only work 4 to 5 hours and be able to have fun while other days they would work 8 hours and not have time for fun. The IRS has limited the deductions to rental income on the grounds that the 14-day personal use provision was exceeded.
The main issues of this case are whether the Harrell’s exceeded the 14-day personal use provision, whether they can deduct rental expenses exceeding rental income, and whether or not the activities are engaged in for profit. Section 280A(d)(1) explains that the deductions are limited if the taxpayer’s personal use on the house exceeds the greater of 14 days or 10% of the number of days the unit is rented, because the vacation home would be considered a residence. The log maintained by the couple indicates that the couple used 14 guaranteed personal days. If even 1 out of the 28 days that the couple partially or fully worked on the house is considered a personal day than the 14-day provision is violated. However, if none of those days turn out to be considered personal days then the loss in excess over rental income can be deducted according to section 280A. Section 183(a) permits no allowable deductions for activities not found to be engaged in for profit. However, we found that the Harrell’s activities are found to be engaged in for profit and should therefore be allowed these deductions.
Section 280A was issued in response to the public concern that taxpayers were only renting their vacation homes to deduct personal expenses that would be otherwise nondeductible. This statute provides a two part limitation on the expenses that can be deducted relating to a vacation home. The first limitation has to be done if the home is used for personal purposes during any part of the year and results in separating deductible rental expenses from nondeductible personal expenses according to section 280A(e)(1). This limitation is equal to the product of the total expenses and the number of days rented at fair value/the total number of days used for any purpose. As decided by the IRS in this case, the second limitation is put into effect if the personal use exceeds the greater of 14 days or 10% of the number of days the house was rented. If personal use exceeds this amount then the vacation home is considered a residence and limits the deduction to rental income. However, we found that the Harrell’s did not exceed the second limitation and should also be able to deduct the amount deductible under the first limitation that exceeds rental income. As shown above, Section 183(a) can also...
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