Renting below FMV may result in lost deductions due to vacation home rules.

• Author: Wiesner, Philip J.
• Position: Fair market value

The Tax Court recently concluded in Colbert, TC Memo 1992-30, that renting property at below fair market value (FMV) is considered personal use under Sec.

280A(d)(2)(C). This case is significant because the property was not being rented to a family member. Rather, the property was being rented to unrelated low-income persons. While the particular facts in this case might be distinguishable from many rental agreements between landlords and long-term tenants, the case should put practitioners on notice that the Service is challenging deductions related to some below-market rental arrangements. Because of their potential for abuse, rental arrangements between family members may be likely candidates for IRS scrutiny.

In Colbert, the taxpayer acquired rental property by inheritance from his deceased wife. The property was initially rented out by Colbert's wife for $130 per month. After the inheritance, Colbert continued to rent the property for $130 per month to various unrelated "low-income" persons. Colbert paid his mother-in-law to manage the property. In 1987, after Colbert ceased renting to third parties, his mother-in-law resided in the property without charge. Colbert did not argue that $130 per month represented FMV rent; rather, he contended that he was holding the property for investment.

Applying Sec. 280A(d)(2)(C), the court determined that Colbert had...