Rental Activities

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Chapter 9
CCH Essentials of Federal Income Taxation

• Rental Activities

2003, CCH INCORPORATED 4025 West Peterson Ave.
Chicago, IL 60646-6085
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Rental Income

• Rental income includes the payments taxpayers
  receive for allowing others to use or occupy
  their property.

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Rental Expenses

• Advertising
• Cleaning
• Maintenance
• Utilities
• Real estate taxes
• Mortgage interest

• Insurance premiums
• Management fees
• Necessary travel and transportation
• Repairs
• Depreciation

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Special Rules When Only Part of the Property Is
Rented

• Sometimes the taxpayer rents only part of the
  property. When this is the case,

The taxpayer must allocate expenses between
rental and personal use. The taxpayer then deduc
ts the rental portion of each expense against
rental income and can deduct the personal portion
of the mortgage interest and real estate taxes as
itemized deductions.
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Rental of Vacation Homes

• Property rented less than 15 days
• rental income is not reported
• no expenses may be deducted as rent expenses
• home mortgage interest, real estate taxes, and
  casualty losses may be deducted
  
• Property rented more than 14 days
• expenses related to the property must be
  allocated between rental and personal use

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What Is a Fair Rental Price?
The following questions can be used to determine
whether two properties are similar

• Are the properties used for the same purpose?
• Are the properties about the same size?
• Are the properties in about the same condition?
• Do the properties have similar features?
• Are the properties in similar locations?

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Loss Limitations

• When rental expenses exceed rental income and
  the rental property is considered a residence,
  the vacation home rules limit the amount of rent
  expenses taxpayers can deduct against rental
  income. For rental property not subject to the
  vacation home limitation rules, two other sets of
  rules may affect the taxpayers ability to deduct
  losses arising from rental activities the
  at-risk rules and the passive activity loss rules.

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At-Risk Rules

• The at-risk rules limit a taxpayers loss to
  the amount the taxpayer could actually lose from
  an activity. This is known as the amount the
  taxpayer is at-risk.

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Amounts at Risk

• A taxpayers risk in any activity equals the
  following
  
• The money and adjusted basis (cost improvements
  accumulated depreciation) of any property
  contributed to the activity, plus
  
• Amounts borrowed for use in the activity if the
  taxpayer either is personally liable for the loan
  or pledges personal assets for the loan

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Passive Activity Losses

• Taxpayers can deduct passive activity losses
  only to the extent of passive activity income.
  Taxpayers carry over disallowed losses to offset
  passive income in future tax years. When the
  taxpayer disposes of the entire interest in a
  passive activity, any suspended losses left on
  that activity are fully deductible in that year.

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Definitions

• Portfolio income comes from investments that
  generate dividends, interest, and royalties.
  
• Active income consists of wages, salaries, and
  income from material participation in a trade or
  business.
  
• Passive income generally comes from
• a trade or business in which the taxpayer does
  not materially participate
  
• rental activities
• limited partnerships
• Material participation occurs when the taxpayer
  is involved in the operations of the activity on
  a regular, continuous, and substantial basis.

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Real Estate Trade or Business
A real estate rental activity may qualify as an
active trade or business if

• More than 50 of the personal services rendered
  during the year are performed in a trade or
  business involving real estate, and
  
• As a minimum, the taxpayer performs more than 750
  hours of personal service in the real property
  trade or business

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25,000 Special Deduction for Active Participants
To qualify for this special deduction, the
taxpayer must meet both of the following
requirements

• The taxpayer actively participates in the rental
  real estate activity, and
  
• The taxpayer owns at least 10 of the value of
  all interests in the activity throughout the
  entire year

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Formula for Loss Allocation Process
Loss from separate activity Total di
sallowed loss ? Sum of all loss
es
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Dispositions of Passive Interests
Generally, when taxpayers dispose of their entire
interest in a passive activity, any suspended
losses relating to that activity are deductible
in full. To qualify for this treatment

• Taxpayers must give up their entire interest in
  the activity,
  
• There must be a transfer of ownership in a
  transaction where any realized gain or loss if
  fully recognized, and
  
• The new property owner cannot be the taxpayers
  sibling, ancestor, or descendent.

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