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Going for the gold: Sec. 280A and Olympic rentals.

Major sporting events (such as the 2002 Winter Olympics, the Super Bowl or the Masters golf tournament), may confer gold on more than just the athletes involved. Homeowners in host cities where housing is in particular demand for short periods surrounding major sports events or regional celebrations (such as Mardi Gras), have found that visitors are often willing to pay Olympic-size rentals for the use of local residences. Even better, because of Sec. 280A(g), these rents may be tax free.

Sec. 280A's primary purpose is to limit deductions on vacation rental homes and the business use of personal residences--both situations in which taxpayers frequently mix a dwelling's personal and business use. If a taxpayer's personal use of a dwelling unit exceeds the greater of 14 days or 10% of rental days, his rental expenses would be deductible only up to the rental income amount. Prop. Regs. Sec. 1.280A also echoes this focus on distinguishing between business and personal use.

Both Sec. 280A and the proposed regulations basically ignore the income-producing aspects of such rentals. Sec. 280A(g), a de minimis rule, blocks artificial loss deductions attributable to very short rental periods:

(g) Special rule for Certain Rental Use.--Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then--no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.

For owners who rent their vacation home for fewer than 15 days yearly, Sec. 280A(g) makes the rental income (and deductions) tax free. Taxpayers can also deduct their mortgage interest and property taxes on their second homes. The next question is whether taxpayers can also apply Sec. 280A(g) to their primary (and perhaps only) residence. If so, homeowners in host cities choosing to rent their dwellings for fewer than 15 days could avoid declaring the rental income as taxable entirely. The tax benefits may be large, as some homeowners may be able to elicit thousands of dollars for short-term rentals.

Sec. 280A(d)(1) clearly indicates that a taxpayer uses a dwelling unit as a residence when he uses it for personal purposes exceeding the greater of 14 days or 10% of rental days. A taxpayer's primary residence should obviously meet this requirement. Further, the Conference Committee Report to P.L. 97-119's amendments to Sec. 280A in 1981 specifically referred to "... rules relating to rentals of the taxpayer's principal residence...." Even IRS Pub. 527, Residential Rental Property, discusses both a vacation home or other dwelling unit as qualifying for the Sec. 280A(g) exclusion. Thus, it appears the Sec. 280A vacation home rental rules also apply to a taxpayer's primary residence.

The Service has not turned a blind eye to such potentially large rental payments escaping taxation. Legislation has come close to eliminating Sec. 280A(g) in recent years; the House Bill for P.L. 105-34 would have repealed it for tax years after 1997. However, Congress dropped the provision in the Conference Committee.

In certain situations, the length of the event may preclude tax-free treatment. For example, the 2002 Winter Olympics lasted for 17 days--putting the beneficial exclusion of Sec. 280A(g) out of reach for owners renting their own homes for the entire duration of the games.

Thus, like any good athlete in a sporting event, a homeowner who is knowledgeable about the rules of the tax game stands to benefit most. Savvy homeowners can "go for the gold" in 2002--with just a little awareness of Sec. 280A(g)'s 14-day limit, they become winners too.

FROM DEBRA M. GRACE, PH.D., CPA, CALIFORNIA STATE UNIVERSITY AT LONG BEACH, LONG BEACH, CA, JOHN O. EVERETT, PH.D., CPA, VIRGINIA COMMONWEALTH UNIVERSITY, RICHMOND, VA, AND DAVID B. DAVIDSON, PH.D., CPA, CALIFORNIA STATE UNIVERSITY AT LONG BEACH, LONG BEACH, CA (NONE AFFILIATED WITH KPMG LLP)
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Title Annotation:2002 Winter Olympics; deductions on vacation rental homes, business use of personal residences
Author:Davidson, David B.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Jun 1, 2002
Words:694
Previous Article:Tax Court expands Sec. 1033's scope.
Next Article:Interest deductions for bankrupt corporations.
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