Archive for August, 2012|Monthly archive page

Renting Your Vacation Home – Part I

Originally published in the Cedar Street Times

August 10, 2012

August is here; summer is slipping away; and families are fitting in last-minute vacations before school is about to start.  Perhaps you are one of the landlords collecting a little more rent to help battle the bottom-line.  A good topic for you to review is whether or not you understand the tax laws relating to a vacation rental home.  In my experience, most landlords and a fair amount of tax return preparers could use a refresher on this topic, or maybe the beginner lesson they missed!  I warn you that the rules are less friendly than you may realize, however, I am not a believer that ignorance is bliss, and I can guarantee you that the IRS is not.

The crux of taxation on a vacation home comes down to “personal use” of the property.  If you remember anything at all from this article, it is that EVERY day of personal use cuts into your tax deductions.  One of the most proliferated errors on this topic is that the landlord can use the property for up to two weeks a year with no negative ramifications.  This is categorically incorrect; the laws are spelled out quite clearly in Internal Revenue Code Section 280A and related Treasury Regulations.

It is also important to understand what the IRS means by “personal use.”  Personal use includes any use of the property by any of the owners, their family members (sibling, spouse, ancestors, descendants of any owners), or anyone else with free use or paying less than fair market rent.  Even if a family member pays fair market rent, it is still considered personal use unless it is their primary residence.  The only way for any of those members to be present and not have the property counted as personal use is if they are working on the property.  The IRS even defines quite strictly what working on the property entails – it is sufficient to say that an eight-hour workday for everybody present is requisite, and the IRS could ask to see work logs, receipts, etc.

I think this expansive definition of personal use nails about 99 percent of people with a vacation home, right!?  After all, most people that have a vacation home bought it or kept it because they like the place and enjoy staying there!

So now that you have determined you likely have personal use of your property, how does this affect the taxation?  Your homework is to count up the days of personal use you anticipate for 2012, and the number of days you expect to rent it, and in two weeks I will tell you what it means.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Donating Your Bald Eagles and Blue Jeans

Originally published in the Pacific Grove Hometown Bulletin

August 1, 2012

If you missed the July 22 issue of the New York Times, you missed a great article about estate tax the IRS is trying to levy on a piece of art that includes a genuine stuffed bald eagle.  The IRS has valued the piece of art at $65 million and wants the heirs of New York art dealer Ileana Sonnabend to pay approximately $29.2 in estate tax.

The rub, however, is that it is illegal to sell the piece of art due to the 1940 Bald and Golden Eagle Protection Act.  The heirs and their appraiser are of course contending the value is $0 since they cannot legally sell it – how can it have value?  The IRS Art Advisory Panel reportedly called it a “stunning work of art” and is contending that it could be sold illegally on the black market and therefore has value.  It sounds to me like our government wants to have it both ways – you cannot sell it but, we are still going to tax you as if you could.  I think our tax policy should promote legal activities!

The end of the article mentions a possible charitable donation instead.  I suppose this could be an option for the heirs.  Unfortunately, the estate tax would not be eliminated, since the heirs would be the donors and not the decedent.  They would also have to be able to absorb a $65 million donation in a six year period against their income.  IRS law allows you to make a charitable contribution up to 50% of your income each year which can be carried over for up to five more years.  After that, you lose the rest permanently.  One strategy for large noncash gifts is to give a partial interest in the item each year and loan the rest to the charitable organization.  This way, you do not lose any of the valuable deductions.

It is important to remember that current IRS law requires an appraisal for donations over $5,000.  This would also include multiple gifts during the year of similar items that add up to over $5,000.  So if you are taking lots of trips with household items and blue jeans, just make sure it does not go over $5,000 during the year.  It is hard to get an appraisal on a pair of jeans you donated eight months ago.  Oh, and be sure to get your charitable gift receipt!

Regarding the bald eagle art – I sure am glad Mrs. Sonnabend did not leave it in her will to me –   sounds more like a white elephant from my perspective!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.