Prepaid Vacation Home Rental Income

[Robbie]

Client received rent for January and February on his second residence at the end of December.  So, it is prepaid rent and taxable in 2021.  There was no rental use of the vacation home during 2021.  So used zero days for rental - so this isn't taxable in 2021 under the vacation home rules?

[Pacun]

Prepaid rent is taxable when received.

[Robbie]

What I was wrestling with is the 15 day rule which states the rental income is not reported as income if the dwelling was rented for less than 15 days during the tax year IRC 280A(g).  For 2021, the rental usage is zero.  For 2022, the usage will be 61 days.  I know prepaid rent is taxable for a property which is in fact a rental property, so that wasn't the question.  To not report the income at all obviously isn't correct, but to report the income in full in 2021 and not be able to deduct a portion of the property taxes during the rental usage seems unfair. Particularly as there is no benefit on Schedule A to the client for additional state taxes. It seems more logical to interpret the 15 day rule in this  situation as allowing the rental income to be matched with the period of usage. 

[Lee B]

The key question is"When was it available to be rented?"

That determines when depreciation and related expenses can be deducted.

[Terry D EA]

1 hour ago, cbslee said:

The key question is"When was it available to be rented?"

That determines when depreciation and related expenses can be deducted.

I agree totally. When it becomes available for rent determines when to begin deducting expenses. If it was available for rent all year but never rented, the same applies. So, if it was available for rent in let's say, September and you collected two months pre-paid rent in 2021 to be rent beginning in 2022, the pre-paid is income for 2021 and deduct the associated expensed for 2021 including the depreciation. 

Judy, can you give a reference for the rule you mentioned?

[jklcpa]

2 hours ago, Terry D said:

Judy, can you give a reference for the rule you mentioned?

Can't find it now so I took my post down.

[DANRVAN]

On 2/1/2022 at 8:18 AM, Terry D said:

When it becomes available for rent determines when to begin deducting expenses.

That would be the case if it were not also used as a second residence / vacation home.

In this case, I believe the expenses are allocated based on the total days used.

For 2021 there were zero rental days, therefore zero expenses.

For 2022 the days used in Jan and Feb will be allocated as rental days in determining the amount of deductible expenses for 2022.

[Terry D EA]

Once again, I agree. But, the OP doesn't state when the property became available for rent. Can't determine the number rental days. All he says is there was no rental use of the home in 2021. Doesn't say whether it was available for rent any time during 2021.  If it was not made available for rent anytime during 2021, then no rental days no expenses. Waiting to see what the OP says.

[DANRVAN]

4 hours ago, Terry D said:

Doesn't say whether it was available for rent any time during 2021.

That doesn't matter in the case of of a rental which is also used for personal purposes.

The ratio for determining the deductible expenses is number of days rented over total number of days used (for any purpose) during the year.

4 hours ago, Terry D said:

All he says is there was no rental use of the home in 2021.

So there is no allocation of expenses per sect 280A(e)(1).   The ratio is zero over the number of personal use days = zero.

 

[DANRVAN]

On 2/1/2022 at 1:02 AM, Robbie said:

and not be able to deduct a portion of the property taxes during the rental usage seems unfair. Particularly as there is no benefit on Schedule A to the client for additional state taxes. It seems more logical to interpret the 15 day rule in this  situation as allowing the rental income to be matched with the period of usage

But that is the reality of cash basis accounting.  

And since December 31 has come and gone, it is too late to plan around it.

[DANRVAN]

12 minutes ago, DANRVAN said:

The ratio is zero over the number of personal use days = zero.

Meant to say over number of days used for any purpose.

[Robbie]

My thanks to the responses to my original post.  I believe I had arrived at DANRVAN's position myself.  In a further discussion with the client trying to tie down the date it originally became available for rent, and after hemming and hawing on the client's part, particularly as to how much personal time he was going to spend it the house during 2022, I have advised him that it is a rental property and not a second home subject to the vacation home rental rules.  Thanks for everybody's input!