Time to capitalize on the ultimate super shelter.

• Author: Schnepper, Jeff A.
• Position: Economic Observer - Tax free rental income

THIS ONE is going to get me in plenty of trouble! How would you like to take money out of one pocket, deduct it as a business expense, then put it in your other pocket tax free? Even better, how would you like to do it legally?! It really is quite simple once you get the basic idea.

First, assume you have a legitimate business and rent a suite in a hotel for a meeting. You actually have and can document it as a business event. Clearly, the rent you pay is an allowable business deduction. Both small and big businesses do this all the time. Nothing new here, at least not yet. Remember, the hotel has taxable rental income. Now, instead of your business renting a suite in a hotel, you rent my home. Once again, if you actually use it for business purposes, and can document the business use, there is no reason why you should not get the same "rental" deduction on your tax return. The other side of the coin is that I should have rental income, right? Wrong!

I want you to think Olympics, Super Bowl, and World Series. Many years ago, Congress recognized that there were going to be situations where someone might rent out his or her home on a short-term basis. Rather than require an allocation of heat, electric, utilities, depreciation, interest, taxes, etc. over the short-term rental, Congress actually came up with a reasonable solution. The short-term landlord gets zero additional deductions for the "rental" expenses, but none of the income is taxable. The Code Section (because everyone is going to look it up) is 280A (g). It specifically states that if you rent out your home for less than 15 days during the calendar year, none of the income is taxable.

Beating the code

Keep in mind that the Internal Revenue Code is full of general rules, exceptions, and exceptions and limitations to the exceptions. If you are an employee of the business that rents the house, then there is an allowance to the exception. You get zero deductions for the rental of your house to your employer. However, we are not talking about the deductions you, as the landlord, are getting for the rental of your house. You are getting none of those deductions anyway. What we're excited about is the deduction your company (the short-term tenant) gets for renting your house. That is not the subject of these limitations. Merely the deductions for your expenses as the landlord are denied--and I would trade them any day for the tax-free income!

Let's get creative. If you have a regular--or...