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

• Author: Grace, Debra M.
• Position: Deductions on vacation rental homes, business use of personal residences - 2002 Winter Olympics

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...