Reporting dilemma: personal use of rental properties.

• Author: Hagy, Janet C.

When the IRS issued the latest version of Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, in December 2010, it added three new columns to the revised form, one to enter a code for the type of property being rented and two columns of significance for both practitioners and taxpayers: fair rental days and personal use days. Now that reporting the number of days each rental property is rented at fair rental value and the number days the property is used for personal purposes is required on Form 8825, practitioners must decipher Sec. 280A and Prop. Regs. Sec. 1.280A-1 as they apply to partnerships and S corporations owning dwelling units. Properly apportioning the expenses between personal and rental use presents several challenges. Experience shows that practitioners are not using consistent methods to calculate and prepare Form 8825 and the related Schedules K-1.

Some of the challenges result from insufficient congressional guidance and do not have legislatively defensible answers. This article summarizes the known rules and regulations related to use of dwelling units and identifies questions that practitioners must address in their own practice.

One common argument is that the determination of personal vs. rental use occurs at the owner level rather than the entity level. However, this approach is refuted in Prop. Regs. Sec. 1.280A-1(a), (1) and the addition of days of use information on Form 8825 confirms the IRS's intent to pursue the issue.

Another proposal to have partners pay fair market rent to the partnership for days used also fails to defeat the calculation of personal use days. As discussed in Prop. Regs. Sec. 1.280A-1(d), the personal use rules supersede fair rental rules. (2)

The only exceptions to the personal use allocation rules are where the partnership rents the property to a partner or related party for use as that person's principal residence. The following discussion does not pertain to this type of rental arrangement.

Determining Personal Use Days

Once the total income and expenses have been calculated for a property, the next consideration is how to determine the number of personal use days. This can be challenging when there are multiple unrelated partners. Unrelated partners may rent their allocated time outside of the partnership, further complicating the reporting. Even in a close family relationship, obtaining data and tracking usage of "vacation" property can be hard for a practitioner to obtain. Basically, a "day" is counted when overnight accommodation is provided.

"Personal use days" as defined in Sec. 280A(d)(2) include:

1. Use by "the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined by section 267(c)(4)) of the taxpayer or such other person." The attribution rules referred to in Sec. 267(c) (4) include siblings, spouse, ancestors, and lineal descendants. According to Prop. Regs. Sec...