Vacation / Rental Home

[Tal10]

Conflicted!

Client purchased a condo in January 2024. He made multiple trips to the condo in 2024 for the sole purpose of making improvements and repairs, and furnishing the condo. The renovations were completed, and my client rented out the property for 2 months in 2024. His intention when he bought the condo was to rent it out 3 months of the year, and have it available for personal use the other 9 months. It's my understanding that days spent at the condo solely for the purposes of making repairs and renovations are not considered personal use days. So, technically there are 0 personal use days, and 61 rental days. Client spent $75,000 on furnishings in 2024, and it just does not feel right that he should be eligible for bonus depreciation on such. As a taxpayer, I don't think it's right that I have to foot the bill for what is mostly for his personal benefit, and I'm sure the IRS doesn't like this either. But if these are truly the facts, does he get these deductions? Since it is not listed property, there would be no recapture requirements in 2025 either.

[BrewOne]

I had one similar, not as bad on furnishing, but constantly traveling to their condo even when they had a management company.  But they vehemently insisted that every trip was to work on the condo and all I could really do is say that they might be required to document what they actually did on every trip if they were audited (I also "culled" them from my client list after that return).  I would try to avoid judging them based on "taking advantage" of the law, but it's still your choice whether or not to prepare their taxes.

One factor is if part or all of the loss is not allowed, special depreciation is not really doing much for them.

[Lee B]

With second homes stuff happens and plans often change so just because you can doesn't always mean you should

[Tal10]

Thanks for the replies. The client has two other rental properties that generate decent income, so they can take full advantage of the bonus depreciation. And I wouldn't doubt if the client knew about this loophole, and I also wouldn't doubt that the property will never be rented again. Very hard for me to claim a rental property with $2,000 of income and $60,000 in expenses. But I feel I have to claim all of these deductions or I wouldn't be doing my job. Grrr. As for letting the client go, it's really not an option.

[Lee B]

It would have been helpful, if you had included this information in your original post

[jklcpa]

Is this client using a management/rental agent? If so, those companies usually have a report that shows the actual days rented and the days it was owner occupied. If you can get that, you may be able to see if receipts for fixing up and repair costs match up to any of those dates after it was put in service. If there are no receipts for repair supplies but the report shows owner usage, then what exactly were they doing there?  Even something as simple as painting requires materials, but if it is a nice enough property to be rented as a vacation spot that the owners choose to stay themselves, then what would be needed at that point other than routine cleaning or fixing something minor that was broken by a tenant?

Are you sure that all of the $75K is furnishings that would allow the bonus depreciation?

Is it available for rental this year, or is it already out of service?

I also wonder about the $2,000 of income for 61 days of rental. That seems really low to me, but maybe it is your location compared to mine. What kind of property are we talking about here? Are these short-term rentals in a nice vacation area or a more rustic site like a cabin in the woods?

 

[Lee B]

It's starting to sound like your client is trying to bend the rules in his favor, which means that you need to ask more questions and ask for more documentation,

just like Judy suggested.

[BrewOne]

thanks Judy for pointing that out--If $2,000 is gross income on 61 rental days...any days where below market rent was charged counts as personal use.  If it was available for rent for 61 days, then I'd want to hear a break down of how many nights it was actually rented.

[Tal10]

My client is not using a property management company. He is doing all of the work himself. I have literally hundreds of receipts to prove that. So, I don't doubt that every trip there in 2024 was solely to work on the property. And yes, $1,000 a month seemed low to me as well. Purchase price of the condo (in Florida) was just over $300K. Condo doesn't allow short-term rental. It must be more than 30 days.

[jklcpa]

Ask more questions.

Every day rented at below market rate is considered personal use, and this may not be a rental at all as far as deductions are concerned. 

If that is the case, the income becomes ordinary income, deductions evaporate except for those that would be allowed on Sch A.

[Lee B]

Also, you need to whom it was rented, a related party or a friend?