Discussion:Fractional-interest Condo Income/Expenses

Last year, my client rented out 1 week; he did not use it personally at all (he purchased his interest on May 31 of last yr). The quarterly dues are substantial; they cover utilities, property taxes, insurance, maintenance, supplies, staff salaries, etc.

Because the Private Residence Club (the manager of the condo project) provides housekeeping and daily maid service for the benefit of persons renting a given week (which is paid for by the fractional owner that is renting out such week), IRS Pub 527 indicates that Sch C or Sch C-EZ should be used. Schedule E appears to be better suited to reporting expenses associated with rental activities. Which and Why?

In my client’s case, I understand that all of his rental revenues plus all of his expenses, including depreciation, would be in the Schedule. The expenses exceed the revenues. I know there are 'At-Risk Rules' and 'Passive Activity Limits' re: rental losses. Concerning the 'At-Risk Rules', he paid cash for his fractional interest, so 100% of his investment is 'At-Risk'. Does investment income qualify as "passive income" for the purpose of offsetting passive rental losses? Can the passive losses be carried forward?

Since your client does not manage the rental (the manager does that), passive loss limitations apply. They would be carried forward to future years. Your software should help track the suspended losses.

May I infer that investment income does not qualify to offset passive rental losses?

You are missing the sentence: "This information can be difficult to obtain; thus, it seems reasonable to base this allocation on the taxpayer's actual personal and rental use percentages."

My original question was about a 1/7-fractional interest condo. I guess the Code treats fractional-interest owners and timeshare owners pretty much the same (a/k/a, identically).

Your software would probably process this correctly if you have a checkbox for DID NOT PARTICIPATE on your screen for entering the Sch E info. That should take it to your form 8582 with other passive activities.

KathiJud, how does the Code lead one to come up with a percentage other than 100%? Also, this is the first year of activity ownership and it includes only 7 months, if that makes any difference as to materiality of rental.

"A timeshare owner who rents a unit for some or all of his or her allotted time is generally subject to the Sec. 280A vacation home rules, which limit deductions and require expense allocations. The Sec. 280A(d)(1) 14-day/10% test is applied to the unit as a whole, counting the personal days of all the unit's owners during the year. Thus, personal use will almost always be sufficiently substantial to cause all of a unit's owners to be subjected to the Sec. 280A vacation home rules.

Prop. Regs. Sec. 1.280A-3(f)(5) appears to require timeshare owners to allocate expenses between personal and rental uses based on all the units' owners' use during the year (i.e., the personal and rental percentages will be the same for all owners)."

People that work for large organizations know that frequently there are two organization charts: one that is on paper; and then there is the "real" chart.

In my TP's case, there are 97 co-owners. For some fractional-interest and some timeshare properties, the number of co-owners could well be several hundred and perhaps as many as a thousand. The management company does not have a system for tracking personal days and rental days of use; they only care about whether each of the units is occupied. (If the unit is occupied, they send a bill for daily housekeeping to the appropriate owner.) Depending on the frequency of ownership turnover and various tax year-periods that the owners may use, it might be difficult for the management company to report rental/personal use averages for the entire project for various time periods. When the project has units with various numbers of bedrooms is also a complicating factor.

Thanks very much for your comments on this issue; they have helped me a great deal. One last reason for impracticality of allocating expenses on basis of overall averages for Project. Project Manager is not aware of whether any given unit is: 1) being occupied by a friend or business associate of the owner at a rental rate below the current "rack rate", including possibly zero; or 2) the result of an "arms-length" transaction renting such unit most likely at a non-zero rental rate (at least more than the daily housekeeping charge).

I believe impracticality of getting info does not relieve you of compliance with 280A rules.

You would not be reporting this activity properly by taking any deductions that exceeded the rents received plus taking any unused mortgage interest and property taxes to Schedule A. Same affect as my earlier statement: That one week of rent is tax free and you have potential Sch A deductions.

The IRS is saying that the other owners are my partners or an unincorporated association or at the least we have TIC type of ownership.

The Code Section 280A rules were enacted to deal with the specific situation of multi owner vacation type properties such as time shares and condos in resort areas. That is exactly the animal being discussed in this thread. Congress (and IRS) believed they should close off any possibility of unjustly reporting a minimal amount of rent income and a maximum amount of what would otherwise be personal expenses. I happen to agree with that.

That is referring to the general rule in Pub 527 for vacation homes. When TP has not used the unit for more than 10% of days rented etc.

But isn't that rule only for dwelling units used by the taxpayer "as a residence"?

My copy of Pub 527 says "Exception for Minimal Rental Use - If you use the dwelling unit as a home and you rent it fewer than 15 days during the year, that period is not treated as rental activity. Do not include any of the rent in your income and do not deduct any of the rental expenses. See Dwelling Unit Used as a Home, earlier." [emphasis added]

Are we counting on the *other* owners' personal use of the unit to satisfy the If you use the dwelling unit as a home... part of this?

     (1) Dwelling unit defined
       For purposes of this section -
       (A) In general
         The term dwelling unit includes a house, apartment,
       condominium, mobile home, boat, or similar property, and all
       structures or other property appurtenant to such dwelling unit.
       (B) Exception
         The term dwelling unit does not include that portion of a
       unit which is used exclusively as a hotel, motel, inn, or
       similar establishment.

"he did not use it personally at all"

"housekeeping and daily maid service for the benefit of persons renting a given week (which is paid for by the fractional owner that is renting out such week),"

"a) General rule

     Except as otherwise provided in this section, in the case of a
   taxpayer who is an individual or an S corporation, no deduction
   otherwise allowable under this chapter shall be allowed with
   respect to the use of a dwelling unit which is used by the taxpayer
   during the taxable year as a residence."

The use or non-use of the "unit" by other "owners" has no effect on classifying my use or non-use, except under the "qualified equity rules".

Schedule C passive activity is where this baby goes.

280A, vacation rules, do not apply because there was no use as a residence by the owner.

The fractional interest owner and the time share owner must look to the rules of 280A. Even if your TP does not use his allotted time in a personal way, the personal use by the other owners involved in this thing make the activity fall under the scope of those rules.

Not gonna argue that point anymore. Read them and make your own mind up.

Provision of housekeeping services by the Condo Association does not equate to the provision of services by that fractional owner. Does not rise to the level of a trade or business for your TP so Schedule C treatment is not appropriate either.

Second, in a timeshare, there is a specific unit that is common to a certain subgroup of timeshare owners. In a fractional, it is an undivided interest in the entire project; think of it this way, there are 14 2-BR units that are shared by 98 1/7-fractional interests: so each interest represents ownership of 1/98 of 14 units. There is no one "dwelling unit" as required by Sec. 280A. It seems like the only option is for the TP to count only his individual days, and then use Sch E and Form 8582.

You seem to think that not having a specific unit is helpful to you and I say that makes it more complex for you because you would be forced to consider the personal days and rented days for all 14 units to come up with an allocation for your TP. You can argue until the cows come home but this clearly falls under the rules of 280A. Congress clearly wanted to limit the deductions available for this kind of activity and you need to understand that. You have been given a lot of good info in this thread to consider. You must make your own decisions since you are the one reporting and signing this return. I am not going to respond again.

 So the first question is also maybe the hardest one:  What is "the dwelling unit" that's the subject of this discussion (in the eyes of the IRS, I guess)?
 

I'm not really getting here late, I'm just rewinding the miles of tape to where the discussion made sense...

280A(d)(1) 280A(d)(2) and 280A(g)

Also, I agree with Harry's comment: "So the first question is also maybe the hardest one: What is "the dwelling unit" that's the subject of this discussion (in the eyes of the IRS, I guess)?"

As KathiJud suggested, let us attempt to crawl into the minds, and hearts I guess, of the Sec 280A drafters (is this the right word?). In 280A(d)(1), the number ‘14’ precedes ‘days’; surely, it was not the intent of Congress for TPs to compare this number with a number like 5,244 (for all of the personal days of fractional owners). Obviously, the focus was, and is, on one unit. Owning 1/98 th of 14 units is a different animal.

KathiJud, even though there is a loss carryforward, the Sch E/Form 8582 route results in a higher tax liability than taking one week of rental income as tax-free and then taking personal share of mortgage interest plus personal share of property taxes to Sch A. << Not exactly "... smacks of a tax shelter deal".

Just think I get credit for someone else business use!!! Not....

1) Fractional interests are not linked to any one unit; and 2) Personal usage data to be provided by each of the fractional interest owners is a "cat's whisker" away from being impossible to obtain: some owners never rent their interests (in particular, why should they provide personal usage data to a stranger??).

280A(d)(1) and 280A(d)(2)

2) Have you EVER tried to tell an IRS representative it was too hard to do this the way the Code says I have to?

Being unable to allocate based on the usage of all owners puts you right back into 280A(g) with up to 14 days of rental income per year tax free (in this case it was one week). It gets there because the usage you have to look at under 280A(d)(1) and 280A(d)(2) says if among ALL the owners there is personal use of more than 10% of days rented with a maximum of 14 days.... You'd be looking for a miracle not to exceed that 14 days.

And yes it smacks of a tax shelter if you have a very small stream of income and deductions that exceed that amount which gave you a carryover.

http://fogelcpa.com/Documents/Fogel-TimesharesCSEA.pdf

I see no substantive difference between the situation described in this discussion and a timeshare. The fractional ownership gives the owner the right to use or rent a particular number of weeks of a condo in the resort, which is the same as a timeshare.

Back to the "dwelling unit" definition required in 280A.

I wonder if all timeshares are so structured. Did the drafters of 280A have timeshares in mind???

Apparently, this addition to the Code must have hurt some sacred cows for in 1980 we see P.L.96.369 which states:

"P.L. 96-369, Sec. 123, provides that: No funds appropriated by this Act [making continuing appropriations for the fiscal year 1981, and for other purposes] may be used to implement or enforce provisions of any regulations or ruling with respect to section 280A of the Internal Revenue Code which relate to—

(1) the rental of a dwelling unit so a member of the family of a taxpayer,

(2) the determination of the principal place of business of the taxpayer, or

(3) the circumstances under which use of the dwelling unit for repairs and maintenance constitutes personal use by the taxpayer."

Sounds just like the wailing and howling that goes on when someone moves against 530 'employees.'

98 owners X 4 weeks use each = 392 weeks per year

14 condo units X 50 weeks per year* = 700 weeks per year

What happened to the other 308 weeks per year?

*typical number of weeks per year a unit is available for use.  Two weeks per year shutdown for maintenance etc.

Coffee or PBR, which will it be this morning?

For the entire project, which may include units varying in size from 2-BRs to 5-BRs, it is typical for resort properties to average far less than 100% occupancy for any year. There is no designated two-week period per year for maintenance, etc. During the "shoulder" seasons, occupancy is very low.

Four weeks per year is the maximum that can be rented (unless a co-owner "forgets" to tell the Project Manager about a week which was rented without the assistance of a rental broker; there is a rental fee, for assumed extra housekeeping/maintenance, that is "supposed to be paid" to the Project Manager). There is no limit for personal usage, other than availability.

The standard rental period is 7 nites.

One theory is to: make the reasonable assumption that total personal days of use exceed 14; take up to 14 days of rental income as tax-free; and take the personal shares (the calculation of which is dependent on perhaps extremely-difficult-to-obtain and, perhaps of questionable validity, usage data) of property taxes and of any mortgage interest to Sch A. Under this theory, if rental days exceed 14, then allocate expenses between personal (including the "taking" of property tax and any mortgage interest personal shares to Sch A) and rental as in the preceding sentence; if there is a net rental loss, then carry it forward.

Of course, the other theory is to count only the TP's personal use days and rental days when allocating expenses. This approach was judged to be "reasonable" in the Craig & Luttman article.

Under 280A(g) Up to 14 days of rental income is tax free and no expenses are deductible except for mortgage interest (subject to overall debt limit) and property taxes on Schedule A. No share calculation applies to those expenses.

Looks to me like the Schedule A real estate taxes and mortgage interest are gonna be like pennies... But we're here to discuss principles, right? Right? I'll be in the kitchen inventorying the fridge.

By inference, I assume you agree with the remainder of my summary.

Of course, the other theory is to count only the TP's personal use days and rental days when allocating expenses. This approach was judged to be "reasonable" in the Craig & Luttman article.

I would be wary of the "reasonable" statement in that article since the IRC appears to require allocation based on the useage of all 98 owners since you are not tied to one specific unit with only 7 owners. I believe you are going to have to find some reasonable allocation method to use other than just your TP's use. Can't the manager of the project give you some guidance on that?

The business use percentage is a fraction where the numerator is all non personal use days and the denominator is total days of use. The allocation is the business use percentage multiplied by every expense category to calculate the Schedule E entries. Excess mortgage interest and property taxes then carry to Schedule A. The balance of other expenses not allowed from that step are personal and non deductible. Yes you could wind up with a PAL carryover after the pro-ration.

Fractional property taxes (when they are not allocated, as in the case of "up to 14 days of tax-free rental income") can be a significant amount.

Kathi, did you really mean that there could be a PAL carryover here? Am I hallucinating when I think that 280A and 469 are mutually exclusive, that is, if one applies, the other one doesn't? Another PBR will really help.

1. Was the property used as residence by the taxpayer, at any time during the year?

If the answer is no, then Section 280A does not apply. A yes answer goes to Section 280A stuff.

2. Was the property used in an activity for profit?

If the answer is no, then Section 183 applies.

If the answer is yes, this is activity entered into for profit then ask,

What is the average stay of the renter?

If under 30 days, or 7 days or less, then Section 469 does not apply.

Otherwise Section 469 applies.

Comments -- I do not see how any other taxpayer's activity can change my classification of the property, unless the other taxpayer has an overlap in ownership in time (i.e. some form of co-ownership).

   (e) Expenses attributable to rental
     (1) In general
       In any case where a taxpayer who is an individual or an S
     corporation uses a dwelling unit for personal purposes on any day
     during the taxable year (whether or not he is treated under this
     section as using such unit as a residence), the amount deductible
     under this chapter with respect to expenses attributable to the
     rental of the unit (or portion thereof) for the taxable year
     shall not exceed an amount which bears the same relationship to
     such expenses as the number of days during each year that the
     unit (or portion thereof) is rented at a fair rental bears to the
     total number of days during such year that the unit (or portion
     thereof) is used.

Consider the above to be an equation: on the left-hand side of the equal sign, in the numerator, you have 'an amount which bears ...', and in the denominator, you have 'such expenses' <<< this has to refer to unit expenses for the tax year, not just 'rental expenses'; on the right-hand side of the equal sign, in the numerator, you have 'rental days for the tax year', and in the denominator, you have '(rental + personal) days for the tax year'. Solve the equation for 'an amount which bears ...'.

Speaking of merry-go-rounds and Coriolis forces...

This *&%$#% question has revealed itself as the Hydra. New heads that want to eat us pop up as faster than we can chop off the old ones. And I'm tired of chopping.

Is my "Hydra" reference even in the right mythological ballpark?

Speaking of ballparks, did anybody see that baseball game?

It's almost midnight, there's still PBR to be processed [You *know* the joke...], and we can get back to 280A in the morrow.

You know what they say ... God (and the Code) is in the details.

I think you are misreading the formula in 280A(e)(1). Multiply all expenses for the year times a fraction. This fraction is number of days rented (at fair rental value) over number of days used. You disregard number of days it sat vacant. The result is your cap on the expense deduction. The inclusion of the phrase "or portion thereof" means you do not adjust for ownership less than a year.

Back to the problem of trying to estimate those two "number of days" categories for all owners and not just your TP.....

That is what it says, but I thought 'used' meant number of days available for use when it comes to seasonal properties? e.g. I live 'down the shore' as we say here, and rental properties usually have a season from Memorial Day to the weekend after Labor Day. On weekends before Memorial Day, the owners often come and 'get the property ready for the season'....i.e., 'they weren't personal use days, they were days we were working on the property.'

And, of course, they come down after Labor Day to 'close up' for the fall and winter, and since fall is the best season here, that closing up seems to take a bit of time.

Days used to work on the property should go in the numerator?

I found one court case that agrees with KathiJud's position that all the days of all the owners are to be used to determine the personal use. This case direct address the issue of using the other owner's use. I caution the use of this case, because of a number of factors, nevertheless it is the only case I found exactly on point.

I also found a number of cases dealing with Section 280A in which the taxpayer had a undivided partial interest (a timeshare) in the property. Everyone of these cases could have had the issue of the use by the other owners of the unit(s) in determining the proper income tax treatment of the deductions in question. Not one of these cases mentioned the use by other owners as a factor of determination before the court.

RoyDaleOne, thanks for your research; I am somewhat unclear as to what you are saying in your second paragraph. By the way, does everyone agree that whichever method is used for the 14-day/10% test, should also be used as the method for allocating expenses between personal and rental.

In Pub. 527: "Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use."

Re 280A(e)(1): KathiJud, in your post, you refer to a "fraction" -- this is exactly the same as the right-hand side of the equal sign in my version (see my post above) of the equation suggested by the Code.

I will use the following notation for certain text snippets: (1) " ... an amount which bears the same relationship to ..." (2) " ... such expenses ..."

The left-hand side of the equal sign in my version of the suggested equation is (1) divided by (2). As drafted, "such expenses" refers to "expenses attributable to the rental of the unit". As I said before, this is nonsensical. The suggested equation works (exactly again, as you think it already does, per your preceding post) with my suggested deletion above.

Minor point: "(or portion thereof)" modifies "unit".

In making the allocation of expenses between personal and rental use, the IRS allocates rental use based on actual total use rather than availability. See Prop. Reg. §1.280A-3(f)(5). The Tax Court, the Ninth and Tenth Federal Circuits allocate rental use based on availability rather than actual total use. See Bolton v. Commissioner, 694 F.2d 556 (9th Cir. 1983); McKinney v. Commissioner, 721 F.2d 163 (10th Cir. 1983). So, you have a choice. I recommend using whichever allocation method that produces the best results for your client.

Before you vote, you'll want to have read the temporary regs at §1.163-10T(p) about home mortgage interest.

§1.163-10T(p) refers to 280A(d) and 280A(g) indirectly refers to 280A(d) as well. So, as far as 'counting days' is concerned, one is left with: 1) 280A(d); and 2) 280A(e)(1).

Below is a link to an excellent article for a wholly-owned property (none of those nasty co-owners). Has a paragraph on the "hobby loss" rules. Also, an example of the independent nature of 469 and 280A loss carryforwards and the tax planning opportunities they present.

The article has three pages; there are two exhibits referred to in the text (containing data for examples) that are not included. However, it takes just a few minutes to drop the numbers into EXCEL and the authors' answers can be replicated.

http://www.entrepreneur.com/tradejournals/article/57795929_1.html

Is the article really eleven years old? Has nothing changed? Like, how long ago was the change that expressly allowed a "second residence" election when a property wasn't lived in by the taxpayer, so long as the property hadn't been *rented* at all during the year? I think it was added to the Code... Added: [oops; that would be 1988 not 1998. ]

Anybody want to start a new thread with just this article so we can fix it up and then republish it?

"(6) Special rule for time-sharing arrangements. Property that is otherwise a qualified residence will not fail to qualify as such solely because the taxpayer's interest in or right to use the property is restricted by an arrangement whereby two or more persons with interests in the property agree to exercise control over the property for different periods during the taxable year. For purposes of determining the use of a residence under paragraph (p)(3)(iii) of this section, a taxpayer will not be considered to have used or rented a residence during any period that the taxpayer does [maybe this provision would be better if "does" were "did" instead.] not have the right to use the property or to receive any benefits from the rental of the property." [emphasis added]

I think Harry's finding is very important. As I indicated in my first post on 26 October, §1.163-10T(p) [under paragraph (p)(3)(iii)] refers to 280A(d). Paragraph (p)(6) further modifies (p)(3)(iii) for timeshares (and for fractionals, we have agreed): it states that, for counting personal use days and for counting rental days, that the ability to "exercise control" over the unit is paramount. Therefore, if there is no "right to use the property", there is no personal use day; and if there is no "right to receive any benefits from the rental of the property", there is no rental day.

Also interesting that the last sentence of (p)(3)(iii) is: "For purposes of the preceding sentence (this clause is confusing), a residence will be deemed to be rented during any period that the taxpayer holds the residence out for rental or resale or repairs or renovates the residence with the intention of holding it out for rental or resale."

When a dwelling unit is wholly-owned, 280A is almost perfect (the screw-up in 280A(e)(2) re: Sch A deductions has been twice remedied by the Tax Court). However, when the "dwelling unit" is co-owned, there are complications: let n be the number of co-owners; the complications increase, perhaps geometrically, as n increases from 1 to a large number.

As you know, the problem lies in two Options: 1) counting only the personal/rental days of the TP; or 2) counting all of the personal days and all of the rental days for all of the co-owners. You mentioned some court cases citing Option 1; could you post the citations?

I think you are correct in referring to the 1.163-10T(p)(6) special rule for time-sharing arrangements. Of course, the subject is "qualified residence interest" which the qualification thereof depends on the count of personal days. However, why does the special rule give such explicit guidance to use Option 1 when counting rental days??? Is such advice to be used somewhere??? (like in 280A(e)(1)???)