When Do You Become A Landlord?

There is a requisite to being an NFL player – current or retired.

You must have played in the NFL.

There is a tax spiff on this point when you decide to landlord.

When does your rental start?

Probably when you place it in service, that is, when you have a tenant and begin receiving rent.

Can it start before then? Say that you are having trouble getting a tenant. Can you can say that you started renting before you have a tenant?

It probably can happen, but you had better line-up your facts in case of challenge.

I am looking at a case where the IRS assessed the following tax:

                 2004             $ 78,292

                     2005             $144,053     

                     2006             $218,228

                     2007             $143,729

                     2008             $252,777

                     2009             $309,060

Numbers like that will attract attention, the kind that can result in a challenge.

There is a doctor who now lives in Florida but used to live in Rhode Island. In 2004 he and his wife bought a mansion in Newport. The house was derelict, having been vacant for four decades.

It was uninhabitable, so the first thing they did was bring in a contractor.

It was a historic property, so there were also some tax credits in there.

Restoration started in 2002.

The work went into 2008.

That is a lot of restoration.

The family moved to Florida in 2005.

I suppose that answers the issue of whether this was ever a principal residence. It could not be if one could not live in it.

In 2006 they met a rental agent who specialized in luxury properties.

They got a temporary certificate of occupancy in 2007 and a final certificate in 2008.

Seems that one could argue that it was available for rent in 2007.

By 2007 the agent was hopeful she could attract a renter. She held up actively marketing it, however, as renovations were unfinished.

Sure enough, one of her clients expressed an interest in 2008.

The debt on this fiasco was ballooning, so the doctor and his wife decided to dump the house. The ante was upped when the bank increased their monthly payment in 2008 from $25 grand to $39 grand a month.

Count me out on ever renting this place.

In July, 2009 they sold the house.

They filed their 2009 tax return and reported a capital loss of a gazillion dollars.

Tax advisors are not overly fond of capital loses, as the only thing they can offset – with one exception – is capital gains. If you have no capital gains, then the loss just sits there – unused and gathering dust.

The doctor and his wife met a tax advisor who said that he could help: just treat the house as business property and the loss would be deductible. The good kind of loss – the kind you can actually lose.

They amended their 2009 return and reported a $8-plus million business loss.

Now they had a 2009 net operating loss. They carried the loss backward and forward. There were tax refunds and jollity aplenty.

However, numbers like that attract IRS attention, especially when you amend a return.

The IRS did not believe they had business property. If it was not business, then the initial reporting as capital loss was correct. The IRS wanted its money back.

Don’t think so, replied the doctor and his wife.

Off to Tax Court they went.

At issue was whether the house ever shifted to rental status, as that is the trigger for it to be business property.

There was one key – and punishing – fact: they never rented the house.

Here is the Court:

While we have no doubt that petitioners devoted a great deal of time, effort and expense to the renovation of Wrentham House Mansion, the record overwhelmingly confirms that Wrentham House Mansion was never held out for rent or rented after the restoration was complete. Quite simply, the rental activity with respect to Wrentham House Mansion never commenced in any meaningful or substantive way.”

Perhaps the doctor and his wife would have held on – at least long enough to rent for a while – if the monthly payment had not skyrocketed. They were pushed into a corner.

Still, no rent = no business = no business loss.

The best they could do was a capital loss.

What is the one exception to a capital loss I alluded to earlier?

You can deduct $3,000 a year against non-capital-gain property.

Which is no solace when you have an $8-plus million capital loss.

The case is Keefe v Commissioner for the homegamers.