rules
A. 1Chapter12
DEDUCTIONSFORCERTAIN
INVESTMENTEXPENSESANDLOSSES
LECTUREOUTLINE
I.
At-risk General rules
1. Taxpayers are entitled to deduct losses only to the extent they are at-risk
a. Unused losses are suspended until the taxpayer has increased the at-risk
amount
2. Rules apply to all activities considered a trade or business or income
producing.
a. The rules do not apply at the partnership or corporate level but rather at
the partner or shareholder level
b. Apply on an activity by activity basis; activities may be aggregated
3. In determining the amount of loss that is deductible from a flow through
entity, the loss is limited as follows:
a. Basis of partnership interest or basis of S corporation stock
b. At-risk limitations
c. Passive loss rules
4. Amounts considered at-risk
a. Sum of money, provided that the cash was not borrowed by the taxpayer
from a relative, an entity controlled by the taxpayer, or a party having an
interest in the activity other than as a creditor (Prop. Reg. 1.465-22)
b. The adjusted basis of other property contributed to the corporation but
only to the extent that property is not secured by a nonrecourse debt [Prop.
Reg. 1.465-23, -25]
c. S shareholders include debt owed to shareholder but not any portion of
corporate debt to other parties
d. Partners include amounts borrowed by the partnership for which they are
personally liable (i.e. recourse debt)
e. Increased for income and decreased for losses and distributions.
B.
Computation of at-risk amount
1. Formula
122DeductionsforCertainInvestmentExpensesandLosses
Beginning at-risk balance
+ Contributions of cash and property (adjusted basis)
+ Increases in recourse debt (taxpayer is personally liable and the lender
has no interest in the venture)
+ Increases in debt for which the taxpayer has pledged property which is
not used
in the activity as security
+ Increases in qualified nonrecourse debt related to realty
+ Income (taxable and tax-exempt)
- Cash or property withdrawals or distributions
- Nondeductible expenses related to tax-exempt income
- Decreases in qualified nonrecourse debt related to realty
- Decreases in recourse debt (T/P personally liable)
- Losses
= Amount at-risk
2. Nonrecourse debt is generally not included in at-risk amount unless it is
qualified nonrecourse financing
a. The financing is secured by the real property used in the business
b. No persona is personally liable for the debt
c. Amounts are borrowed from a qualified person or from the
government
3. Qualified person includes any person which is actively and regularly
engaged in the business of lending money and is not either
a. Related to the taxpayer under Sec. 267(b) or Sec. 707(b) (substituting
10 percent for 50 in these sections); however, this rule does not apply
if the financing is commercially reasonable
b. A person from which the taxpayer acquired the property
c. A person who receives a fee for the taxpayer's investment
II.
Passive activity limitations: Section 469.
A. General rules.
1. Section 469 prohibits losses arising from certain passive activities from
being deducted against the income of other activities.
a. Income is divided into three types:
1. Active (nonpassive) income: wages, salaries, and other income
from an activity in which a taxpayer materially participates;
2. Portfolio income: interest, dividends, and capital gains and losses;
and
3. Passive income: income produced by most tax shelters, rental
activities, limited partnerships, and any other activity in which the
taxpayer does not materially participate.
2. Expenses related to passive activities can be deducted only to the extent of
income from all such passive activities.
a. Excess expenses of these passive activitiesthe passive activity loss
(PAL)may not be deducted against portfolio income or wages,
salaries, or other active income.
LectureOutline123
b. Unused PALs.
1. Held in suspension and carried forward without time limitation to
be used to offset passive income of future years.
2. To determine the amount of suspended loss for each activity, all
losses and income from all passive activities are netted, and any
disallowed loss is allocated among the loss activities pro rata,
using the following formula.
Total disallowed loss for year X
Loss for this activity
Total losses from all activities with losses
= Suspended loss for year for this activity
3. Suspended losses from a passive activity can be used in full to
offset portfolio or active income only when the taxpayer disposes
of his or her entire interest in the activity.
4. Upon disposition, the suspended losses are used to offset income in
the following order: (1) any gain on the disposition of the interest;
(2) any net income from all passive activities for the year; and (3)
any other income or gain [ 469(g)] (But see TAM 9742002 for the
IRS unique approach).
5. Any gain recognized on the disposition of a passive activity is
generally treated as passive income and is used (1) to absorb any
passive losses (current and suspended) from the activity and (2) to
absorb passive losses from other activities.
B.
Taxpayers subject to limitations.
1. Individuals, estates, trusts, personal service corporations, and closely held
C corporations.
2. Not applicable to regular C corporations that are not PSCs or closely held.
a. PSCs: corporation where principal activity is the performance of
personal services and such services are substantially performed by
employee-owners. In addition, the employee-owners must, in the
aggregate, own more than 10 percent of the stock of the corporation
either directly or indirectly (e.g., through family members). Common
examples of personal service corporations are professional
corporations such as those of doctors, accountants, attorneys,
engineers, actors, and architects, where personal services are
performed. This limitation applies since otherwise such individuals
would transfer their losses to the corporation to avoid limitation.
b. Closely held corporation.
1. A regular C corporation where five or fewer individuals own more
than 50 percent of the stock either directly or indirectly.
2. PAL may be used to offset active income but not portfolio income.
124DeductionsforCertainInvestmentExpensesandLosses
C. Definition of activity (Reg. 1.469-4 Fortunately they simplified this down
from 196 pages!)
1. Significance of definition.
a. The definition is critical since it determines the level of aggregation.
Given the guidelines, taxpayers are now able to organize their
activities for the best result.
b. Taxpayers will want to construe the definition of activity very
narrowly for purposes of disposition so that suspended losses can be
triggered more easily and for purposes of passive income so that it can
be generated and used against other passive losses.
2. 469 does not define what comprises an activity.
a. The legislative history indicates that undertakings that constitute
integrated and interrelated economic units that are coordinated or
interdependent are to be considered separate activities.
3. Under the Regulations, one or more operations may be aggregated into a
single activity.
4. Aggregation of operations.
a. Nonrental operations are combined and treated as a single operation if
they are considered an appropriate economic unit.
b. Rental and nonrental operations are normally not aggregated unless the
income of either is insubstantial to the other. The reason for
separating them is because rental is automatically passive and may get
the $25,000 loss exception if real estate.
5. (not in text) The IRS has recently (Rev. Proc. 2010-13, 1/7/2010) issued
rules that now require taxpayers to report, for PAL purposes, their
groupings and regroupings of activities, as well as the addition of specific
activities within the current grouping. The rules apply to all tax years
beginning on or after January 25, 2010. Taxpayers must file a written
statement with their original income tax returns for the first tax year in
which two or more trade or business activities or rental activities are
originally grouped as a single activity. A statement reporting a new
grouping must contain a declaration that the grouped activities constitute
an appropriate economic unit. Statements are also required for the
addition of new activities to existing groupings and for regroupings or
original groupings. Groupings made for years before January 25, 2010
must be reported only if new activities are added or activities are
regrouped. Failure to report whether activities are grouped will generally
result in unreported activities being treated as separate activities.
However, the IRS may regroup activities to prevent tax avoidance.
D.
Rental activities in general.
LectureOutline125
1. A rental activity is automatically considered a passive activity; no level of
participation can transform it into a nonpassive activity.
2. An activity that does not constitute a rental activity may be considered a nonrental
trade or business. In such case, whether the loss or income from such
property is treated as passive depends on whether the taxpayer materially
participates in such activity.
3. Definition of rental activity.
a. A rental activity is any activity in which payments are made
principally for the use of such property [Reg. 1.469-1T(e)(3)(i)].
b. Payments received for use of property will be considered rent as long
as services provided that are related to the rental are incidental (e.g., a
free laundry room in a rental apartment building represents a service
but is considered incidental to the rent paid for the apartment itself).
c. Exceptions: There are six types of rents that are not treated as rents.
E.
Rentals that are treated as nonrental activities.
1. 1-7 Days. Income is not treated as rent if the average customer use is seven days
or less. There is an inherent presumption that the customer is paying
primarily for services rather than the property itself. This presumption
cannot be rebutted. Examples include rentals of cars, video cassettes,
tuxedos, tools, parking lots, and hotels [ 1.469-1T(e)(3)(ii)(A)].
2. 8-30 days. If the average period of customer use exceeds seven, but not 30 days,
the activity is a rental activity unless the owner provides significant
personal services [ 1.469-1T(e)(3)(ii)(B)].
a. The regulations somewhat loosely describe significant personal
services by stating that all of the relevant facts and circumstances
shall be taken into account. No definition of significant is provided
but an example concludes that services are not significant if the value
(usually measured by cost) of the services is less than 10 percent of the
rent. Another example indicates services are significant if the value
exceeds 50 percent of the rent. [See Reg. 1.469-1T(e)(viii) Examples
4 and 2.]
b. There are certain services, termed excluded services, which will not
be counted as significant. Services that will not be considered
significant and will not elevate the activity out of rental status include:
1. Services necessary to permit the lawful use of the property.
2. Services performed in connection with the performance of repairs
that extend the propertys useful life for a period substantially
longer than the average period for which such property is used by
customers; and
3. Services provided in connection with the use of any improved real
property that are similar to those commonly provided in
connection with long-term rentals of high-grade commercial or
residential real property (e.g., cleaning and maintenance of
common areas, routine repairs, trash collection, elevator service,
and security at entrances or perimeters) [Reg. 1.469-1T(e)(3)(iv)
(A) and (B)].
126DeductionsforCertainInvestmentExpensesandLosses
3. More than 30 days: If the average period of customer use exceeds 30 days, the
activity will be a rental operation unless the owner provides
extraordinary personal services [Reg. 1.469-1(T)(e)(3)(ii)(C) and
-(v)]. There is little guidance to this exception. The regulations
mention as examples hospitals in which the boarding facilities
provided by the hospital are incidental to the extraordinary services
performed by the hospitals medical and nursing staff. Similarly,
dormitory facilities provided by boarding schools are incidental to the
extraordinary personal services provided by the schools teaching
staff.
4. Rents incidental to the nonrental activity. Income from rental of
property will not be considered rent when the rental is secondary to the
real purpose for which the property is held [Reg. 1.469- 1T(e)(3)
(ii)(D) and (vi)].
a. The property is held for investment. Specifically, the rental is
treated as incidental if (1) the primary purpose of holding the
property is to realize gain from the appreciation of the
property, and (2) the gross rental income is less than 2 percent
of the basis of the property (or FMV, if less). For example, if a
taxpayer rents out farmland, such rent will not be considered a
rental activity (but still may be passive income if the taxpayer
does not materially participate).
b. The property is held for use in a trade or business. The property
is predominantly used in the business for at least two of the last
five years immediately prior to the taxable year, and gross
rental income from the property is less than 2 percent of the
basis of the property (or FMV, if less). For example, a
developer purchases land to develop a shopping mall and
leases it temporarily to a farmer. Since the property is not held
for use in business and not held for investment, the activity is
considered a rental activity (and the income will not be
considered passive income unless the taxpayer does not
materially participate).
c. (Not in text.) The property is held primarily for sale and is in
fact sold during the taxable year (e.g., if cars are rented
temporarily during the year before sale, rents are treated as
active and not passive income).
d. (Not in text.) The property is lodging for employees and is
provided for the convenience of the employer.
5. Rentals from property also available for use by customers. If the
taxpayer customarily makes the property available during defined
business hours for nonexclusive use by various customers, the
income is not rent (e.g., a golf club or health club where people
pay for a membership but others may rent the facilities as well)
[Reg. 1.469-1T(e)(3)(ii)(E)].
6. Self-rented property. A taxpayer who, in his capacity as an owner,
rents property for use in a nonrental activity conducted by a
partnership, S corporation, or joint venture in which the taxpayer
owns an interest will not be considered a rental activity.
F. Relief for real estate professionals.
LectureOutline127
2.
3.
4.
5.
6.
7.
8.
G.
1. Without special rules taxpayers who are engaged in the rental real estate
business (e.g., owners of warehouses, shopping centers, office buildings
and the like) cannot deduct loses from such business activities since the
law presumes that virtually all long-term rental real estate activities are
passive regardless of the taxpayers participation.
In 1993, however, Congress extended relief to those who are truly in the real
estate business.
An individual is eligible to treat loses from rental real estate as losses from
nonrental activities if two conditions are met. They are:
a. More than 50 percent of the individuals personal services during the
tax year are performed in real property businesses (i.e., real property
development, redevelopment, construction, acquisition, conversion,
rental, operation, management, leasing or brokerage). In the case of a
closely held business, this test is met if more than 50 percent of the
gross receipts of such corporation are derived from real property
businesses in which the corporation materially participates.
b. The individual performs more than 750 hours of services in real
property businesses.
Even if these tests are met, the activities are still considered passive unless the
taxpayer meets the material participation requirements (e.g., spend more
than 500 hours in the activity).
Personal services as an employee in the rental business are not treated as
performed in the real property business.
This rule applies for taxable years beginning after December 31, 1993. Losses of
eligible individuals that are currently suspended but which become
nonpassive to due the application of these rules are treated as losses from
former passive activities and, therefore, continue to be suspended to be
used to offset passive income. These suspended losses may be fully
utilized upon disposition of the property.
Under a new ruling (Agarwal, TC Summ. Op. 2009-29) the relief for real estate
professionals may also apply to real estate agents.
The IRS released procedures in 2011 (Rev. Proc. 2011-34 - not in book) to allow
qualified real estate professionals to make a late election to aggregate
rental real estate interests for applying the passive activity loss rules. This
new procedure is in lieu of taxpayers having to file for a letter ruling in
order to obtain relief for a late election.
Characterization of an activity.
1. Characterization of an activity as passive generally depends on the level of the
taxpayers involvement in the activity, the nature of the activity, or the
form of ownership. The following activities are passive.
a. Any activity which involves the conduct of a trade or business in
which the taxpayer does not materially participate (see below).
b. Rental activities.
1. A rental activity is generally considered passive regardless of the
level of the taxpayers participation.
2. An activity is not treated as a rental activity when substantial
services are performed such as those in operating a hotel or other
transient lodging (e.g., condominium rental). See rental activities
discussed above.
128DeductionsforCertainInvestmentExpensesandLosses
3. As discussed above, an activity is not a rental activity if the
taxpayer is entitled to the relief generally available for real estate
professionals.
c. Section 469(c) also provides that a working interest in an oil and gas
well is not considered a passive activity. In addition, special rules
apply to low-income housing.
H.
Material participation in general.
1. An individual is treated as materially participating only if he or she is
involved in the operation of the activity on a regular, continuous, and
substantial basis.
2. Illustrations.
a. A limited partner generally will not be treated as materially
participating in a partnership. However, per several recent cases,
losses from interests in LLCs and LLPs are not automatically
passive, even if you file as a partnership (Garnett v. Commissioner,
132 TC no. 19 and Thompson v. United States, docket no. 06-211T
(Fed. Cl).
b. Some of the factors to be considered are (these subjective tests are not
in the text):
1. Whether the individual is involved in the operations of the
business;
2. Whether the activity is the taxpayers principal business;
3. Whether and how frequently the taxpayer is present at the place
where the activitys operations are conducted;
4. The nature of the taxpayers involvement (e.g., the taxpayers
involvement in management should require a genuine exercise of
independent discretion and judgment on a continuousnot
intermittentbasis); and
5. Whether the taxpayer has any expertise in the business being
conducted (e.g., a doctor who knows little about cattle-feeding
businesses probably would not be materially involved in this type
of operation).
I.
Material participation test (seven tests to measure if a taxpayer materially
participates).
1. The taxpayer spends more than 500 hours in the activity. For this purpose,
the participation of a spouse in the activity is included only if he or she
performs tasks typically done by owners.
2. The taxpayers participation constitutes substantially all of the
participation.
LectureOutline129
J.
3. The taxpayer participates for more than 100 hours, and no other individual
spends more time on the activity.
4. The taxpayers total participation in all significant participation activities
(SPAs) exceeds 500.
a. A SPA is a trade or business in which the taxpayer participates more
than 100 hours, but fails the other material participation tests.
b. If the taxpayers total participation in SPAs exceeds 500 hours, the
income and losses from each activity are nonpassive; however, if
participation does not exceed 500 hours, losses are passive but income
is recharacterized as nonpassive or active.
5. The taxpayer materially participated in the activity five of the last ten
years.
6. The taxpayer materially participated in the activity for at least three years,
and the activity is a personal service activity.
7. The facts and circumstances suggest that the taxpayer materially
participated.
Rental real estate exception [ 469(i)].
1. Individuals and certain estates actively participating in the rental activity
may deduct (against any type of income) up to $25,000 of losses
attributable to rental real estate annually.
2. The $25,000 allowance is reduced by 50 percent of the excess of the
taxpayers A.G.I. over $100,000 (thus, eliminated where A.G.I. exceeds
$150,000).
3. Applicable only to real estate, not personal property.
4. Active participation means:
a. Participates in management decisions such as approving new tenants,
deciding on rental terms, approving capital or repair expenditures, or if
the taxpayer arranges for others to provide services such as repairs, but
b. In all cases, the taxpayer is not treated as actively participating in the
activity if less than a 10 percent interest is owned. However, the
taxpayer is not presumed to actively participate if the interest is 10
percent or more.
K.
Recharacterized income rules [ 469(1)]. There are six situations in which income that is
normally passive is recharacterized as nonpassive (i.e., active).
1. Net income from a SPA. If the sum of the hours of participation in SPAs
does not exceed 500 (i.e., there is no material participation), all or a
portion of a SPAs income will be recharacterized as nonpassive.
a. The net income and net loss of each SPA is determined.
b. If all of the taxpayers SPAs taken together generate net income, a pro
rata portion of the income of each income SPA is recharacterized.
c. Example. R owns interests in three SPAs, A, B, and C that have
income (loss) of $400, ($300), and $600 respectively. The taxpayer
has net income of $700 from the SPAs. Accordingly $280 of the
1210DeductionsforCertainInvestmentExpensesandLosses
2.
3.
4.
5.
6.
III.
income from A [($700 $400/($600 + $400)] and $420 of the income
from B is active.
Rental of nondepreciable property. Net rental income will be
recharacterized as active income if less than 30 percent of the propertys
basis is depreciable (e.g., ground rents and other rentals of undeveloped
land would be active, not passive). The text states this incorrectly (i.e. is
not depreciable).
Self-developed rental property. Rental income from property developed by
the taxpayer is recharacterized as active if the property is sold within 24
months after first being used in the rental activity. Only the net rental
income in the year of sale must be recharacterized as active.
Self-rented property. Net rental income will be recharacterized as active
income if the property is rented to an activity in which the taxpayer
materially participates, other than related C corporations.
Additional rules apply to income derived from equity-financed lending
activities and royalty income derived through an entity that licenses
intangible property.
Gain from property used in an activity is treated as passive income if the
activity is passive (not in text).
a. If the property is used in several activities, the gain must be allocated
among activities.
b. To prevent the infusion of income into a passive activity to offset
potential losses and create passive income, a special rule exists.
1. Gain from the sale of substantially appreciated property (120% of
basis) is not passive unless the property was used in a passive
activity for (1) 20 percent of the period that the taxpayer owned the
property or (2) the entire 24-month period ending on the date of
disposition.
2. Gain or loss realized on disposition of property used in more than
one activity during 12 months prior to disposition must be
allocated among the activities in which the property was used.
There is a de minimis exception.
Rental of residence (vacation home rentals).
A. In general.
1. Expenses attributable to rental of dwelling units are subject to special
provisions designed to ensure that individuals are not deducting disguised
personal expensesin effect, subsidizing the cost of their personal
enjoyment.
2. Treatment of items related to vacation homes depends on two factors: (1)
personal usethe number of days the unit is used for personal purposes;
and (2) the amount of rental activity. If the taxpayer does not use the unit
at all during the year, these rules do not apply.
LectureOutline1211
B. Use tests.
1. Nominal usedwellings rented for < 15 days:
a. All rental income is excluded from gross income.
b. No deductions are allowed for expenses attributable to the unit except
those otherwise allowable such as taxes, which are itemized
deductions. The treatment of interest in this situation is unclear.
c. This rule presents opportunities for taxpayers who are able to rent out
their home for a short-term basis (or even 28 consecutive days, if the
first two weeks are in December and the last two are in January of the
following year). For example, many California taxpayers rented out
their homes for the two-week period during the 1984 Olympics. One
taxpayer that the author is aware of rents his ultra-modern space-like
home on a short-term basis to movie studios for as much as $30,000 a
week and is able to exclude it all.
2. Substantial owner use: treated as a residence if
a. Personal use is more than the greater of:
1. 14 days, or
2. 10 percent of the number of days actually rented out (not the
number of days held out for rent). Note that this requirement
effectively limits the owners use to two weeks, since the unit
would have to be rented out more than 140 days or almost five
months for the other limit to be applicable. For those wishing to
circumvent this rule so that they can stay in their favorite vacation
spot for more than two weeks, one commentator suggests buying
two condominiums next door to each other, outfitted identically.
b. If personal use exceeds the appropriate threshold, the home is treated
as a residence and deductions are restricted as follows (ordering rules):
1. Expenses allocable to the rental use are deductible to the extent of
gross income less otherwise allowable deductions. Any deductions
in excess of gross income can be carried over and deducted to the
extent of any future income. These expenses are deductible for
A.G.I. since they are related to rental use. First, deduct allocable
interest and taxes, then allocable portion of other expenses, except
depreciation, then deduct allocable depreciation. Total deductions
cant exceed rental income.
2. Expenses allocable to personal use are deductible only if they are
specifically authorized by the Code. Allocable property taxes are
deductible as qualified residence interest since the home in this
case is considered to be the taxpayers residence (i.e., because it is
used more than 14 days). However, if the home is not the primary
or secondary residence of the taxpayer (e.g., the taxpayer had
several vacation homes), any property taxes would be deductible,
but mortgage interest would be treated as personal (rather than
qualifying residence) interest. The other operating expenses are not
deductible.
1212DeductionsforCertainInvestmentExpensesandLosses
3. Used as rental property. If the taxpayer does not use the property extensively (i.e.,
more than the greater of 14 days or 10% the number of days rented out);
then, the property is effectively treated as rental property.
a. Expenses allocable to the rental use are deductible subject only to the
restrictions on passive losses. If the taxpayer is considered as having
met the active participation standard, the taxpayer may qualify for the
rental exception under the passive loss rules. This would allow the
taxpayer to deduct up to $25,000 (subject to the phase-out rule) in
losses annually. However, the property itself may not qualify for the
rental exception if significant services are provided in connection with
its use (e.g., maid service or room service). In such case, under the
passive loss rules the taxpayerassuming the material participation
test has not been satisfiedwould be able to deduct expenses allocable
to the rental only to the extent of any passive income. In contrast, if the
material participation test is satisfied, the expenses would be totally
deductible. Such deductions would be for A.G.I.
b. Expenses allocable to personal use are deductible only if they are
specifically authorized by the Code. Property taxes would continue to
be fully deductible. The treatment of the interest that is not allocable to
rental use is unclear, and this is true despite the fact that the legislation
addressing these issues is over five years old. It would appear that
none of the interest is qualified residence interest since the unit is not a
residence (e.g., the unit was not used more than 14 days). Some
commentators have stated flatly that this interest (that is allocable to
personal use) is nondeductible personal interest. Others have stated
(without rationale or authority) that the interest might be considered
investment interest and is deductible to the extent of investment
income. It would seem that there is some middle ground here. For
example, if the unit was actually rented for 30 days and used 10 days
for personal purposes, then 30/365 of the interest would be allocated to
rental use, 10/365 would be nondeductible personal interest, and the
balance, 325/365, would arguably be investment interest based on the
theory that the unit was being held out for rent, an investment use.
C.
Computations.
1. In determining the deductible amount of expenses, all expenses (e.g.,
interest, taxes, utilities, depreciation, insurance, repairs, and maintenance)
must be allocated between personal and rental use. Note that the method
used to allocate interest and taxes is significant. Since these expenses are
deductible in any event, the smaller the amount that is allocated against
gross income, the larger the deduction of otherwise nondeductible
expenditures such as insurance. This was realized in the Bolton case,
where the taxpayer argued that because interest and taxes are not a
function of actual use but the mere passage of time, the expenses should
be allocated to each day of the year. Thus, the denominator should be 365
LectureOutline1213
rather than the total number of days of use. The Court agreed and
consequently this approach was adopted by most taxpayers prior to 1987.
However, it is unclear whether the Bolton approach is appropriate in light
of the 1986 revisions. The Senate Finance Committee Report indicates
that the allocation of interest is to be made under rules similar to prior law.
Yet, immediately thereafter, the Report states that interest is to be
allocated based on relative use. The Bolton approach is illustrated below.
a. Interest and taxes are allocated to the rental unit based on the
assumption that they accrue regardless of whether the unit is used;
thus, the fraction is:
Number of days rented 365.
These expenses are deductible for A.G.I. since they are attributable to
rents, while the remaining portion of these expenses is an itemized
deduction.
b. Other expenses are allocated to the rental unit based on the assumption
that they arise only because of use and consequently are allocated
using the following fraction:
Number of days rented Total days used.
These expenses are deductible for A.G.I. to the extent of any gross
income remaining while the remaining portion is not deductible.
D.
Personal use defined.
1. A personal use day is any day when the owner or a member of his or her
family uses it for any portion of the day for personal purposes.
2. Repair days are exempted; any day on which at least two-thirds of the time
at the unit is spent on repairs is not considered a personal use day. Note
that the taxpayers family need not work, thus allowing them to use the
unit without penalty while the taxpayer makes repairs.
3. Conversion of a principal residence into rental units, or vice versa, has an
effect on the definition of personal use for this purpose.