Beach House Research Memo

Kevin Inmon
Beach House Research Memo
December 7, 2014
Facts:

In 2009, Ted and Alice Smith purchased a home with intentions to use the
house for occasional family vacations. The Smiths planned to cover the cost of the
house by renting the house. At the time of acquisition the house was in a state of
disrepair, to save money, the Smiths made necessary repairs to the house
themselves. During 2009, according to a log they maintained, the Smiths, and their
2 teenage children, occupied the house for 38 days and rented the property for 49
days. The log also indicated that out of the 38 days the Smiths occupied the
property, 24 of those days found one or both of them engaged in work on the house.
The Smiths filed jointly and treated the home as a rental property, thus they
deducted a pro rata share of the deductible expenses associated with ownership of
the property in determining their net loss from the home. The IRS has indicated
that deductions should be limited to rent income and that some of the costs
deducted as repairs were actually capital expenditures.
Issue:
The decision handed down by the IRS raises the question; did Ted and Alice
exceed the maximum amount of personal use days allowed by the IRS, set fourth
in 280A(d)(1-2) of the tax code?
Conclusion:
No.
Reasoning:
The provisions in 280A(d)(1) state that a dwelling unit is classified as a
residence if it is used for personal purposes for; the greater of 14 days, or 10% of
the number of days during the tax year for which the unit is rented at a fair rate.
Furthermore, it is also fact that Ted and Alice were accompanied by their children
during their occupation, to which 280(d)(2)(A) stipulates that, a taxpayer is
deemed to have used a dwelling unit for personal purposes for a day if; the taxpayer,
a family member, or a person who has interest in the unit uses it. However,
280(d)(2) states; the use of the unit for repairs and annual maintenance does not
constitute personal use, and the presence of other individuals on the premises,
whether or not they are also engaged in repair or maintenance activities, disallows
the unit from being treated as used for personal use on such day. When the facts are
observed in regard to the stipulations set forth in 280(d)(1-2), it can be
determined that they used the property for personal purpose 14 days, which does
not exceed the maximum amount of personal use days. Also, the treatments of the
unit as a rental property and the deductions, including repair cost due to the state of
disrepair at the time of purchase, are allowable because the facts meet the required
provisions.