Discussion:Commercial or Residential rental?

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Discussion Forum Index --> Tax Questions --> Commercial or Residential rental?

1040prep (talk|edits) said:

1 April 2007
My client has purchased a mixed use building. The first floor is a retail store +/- 3500 sq ft and the second and third floors are 4 apartments +/- 3300 sq ft. Is it a residential rental, commercial rental, or should I allocate purchase price to both (based on sq ft)?

Glmpllc (talk|edits) said:

1 April 2007
See IRC Sec. 168(e)(2) which defines residential rental property. If at least 80% of the gross rentals are from the rental of dwelling units, the entire structure is residential rental property. If more than 20% of rentals are from other than dwelling units, then the structure is nonresidential real property.

I'm not aware of any authority to bifurcate the building...in fact the language of IRC Sec. 168(e)(2()A)(i) specifically refers to "any building or structure". Also, See PLR 200526002, which somewhat addresses the issue. It does not carve out nonresidential real property from residential rental property.

To prevail on taking the upper two floors as residential rental property, I believe you'll either have to have at least 80% of rentals coming from the upper two floors (in which case the entire building would qualify) of somehow establish that the upper two floors constitute a different structure.

Shooting from the hip, but maybe having a separate legal entity own the upper two floors might work.

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