Gathering specific details during Enrolled Agent work is crucial to understanding taxable events. Some situations that individuals typically don’t consider relevant may have substantial tax consequences. Armed with a complete summary of facts, an EA can outline circumstances with the same clarity as elements in Enrolled Agent exam questions. The only remaining step is methodological income tax reporting according to IRS rules.
Some of the trickiest tax impacts arise when actions by a taxpayer’s family members are treated just like conduct by the taxpayer personally. One example from Enrolled Agent preparation is personal use of a vacation home. A multitude of intricate tax rules apply to second residences. The most significant factor is deciding whether the home qualifies as a rental property. This determination is based upon comparing the number of rented days to personal use days.
Tax deductions are limited for a dwelling that is used for personal purposes as a second home. However, the dwelling is a rental property and not considered a second residence if the personal use each year is limited to 14 days or ten percent of the rental days, whichever is greater. Calculations of EA problems involving vacation properties are careful to identify if the dwelling qualifies as a personal residence. When the property meets the personal home standards, expenses are divided between the tax-deductible rental days and the non-deductible personal usage period.
Many taxpayers are careful to limit personal use of a vacation property so that all expenses are deducted for the dwelling as a rental unit. The key definition of a rental arrangement is found in an Enrolled Agent study course. A dwelling is rented when any person pays the fair rental price for use of the property as a residence. Careful reading of these tax rules conveys that occupancy for less than fair rental is counted as personal days. This includes use by family members.
In a recent case before the Tax Court, the Langley family discovered the adverse tax result of permitting family members to occupy a second home. The Langleys purchased a residence that they intended to remodel and sell for a profit. Unfortunately, real estate prices in 2008 plunged following completion of the renovations. While they attempted to find a buyer or renter, the wife’s mother was allowed to live in the dwelling. No lease agreement was executed and the property was not advertised for rent.
The taxpayers claimed in court that they charged the mother $600 per month for rent. Comparable properties in the area rented for $800 to $1,100 per month. On their 2008 federal income tax return, the Langleys reported no gross rental income but plenty of expenses. They used tax preparation software that limited their rental loss to $25,000. The IRS argued that the taxpayers did not have a rental property because they collected no rent. Even if they had, the amount was less than fair rental.
Based upon these facts, the court ruled that the mother’s occupancy of the property comprised personal use. No tax deduction is permitted for the second residence other than real estate taxes and mortgage interest as itemized deductions. The Langleys appear to have never considered any tax effects of their actions. Their use of TurboTax software rather than an expert meeting Enrolled Agent requirements severely inhibited their judgment. Most activities have tax considerations attached. Avoiding them usually imperials the unfortunate taxpayers.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.