Discussion:Florida rental property/investment

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Discussion Forum Index --> Advanced Tax Questions --> Florida rental property/investment

Discussion Forum Index --> Tax Questions --> Florida rental property/investment

Ksnoopytax (talk|edits) said:

9 April 2010
I was looking for some guidance on this but am having trouble finding a good answer. I have some clients that bought vacation homes down in Florida which they rent out most of the year. One home was purchased for $850,000 and was only rented out for $16,000 for the entire year. I believe the client's motivation on this property was to purchase it and resell it later for a gain. So now year five comes around and the property is sold for only $650,000 and has $250,000 of passive loss carryforwards. I believe these losses shouldn't be taken because this was really an investment property and the rents were incidental according to Reg 1.469-1T. I don't see why the taxpayer should get an ordinary loss when the intent was an investment. Am I correct in this thinking?

That being said, how are those of you with a bunch of Florida condo rentals normally treating these for tax purposes? I can't imagine those beachside condos make money because they are often vacant parts of the year. Are you treating them as investment or rentals and how are you evaluating the client's intent when they come to you with one of these?


DaveFogel (talk|edits) said:

10 April 2010
Two court cases that I know about have ruled that the holding of a single rental property should be treated as consisting of two activities — a rental activity and an investment activity — and that the rental activity was not engaged in for profit.

In Vandeyacht v. Commissioner, T.C. Memo. 1994-148, the Tax Court held that the rental of a taxpayer’s waterfront condominium and house in Sarasota, Florida, which were held for rental and investment purposes, was not an activity engaged in for profit, despite the fact that the properties were held for appreciation. And in Rivera v. Commissioner, T.C. Summary Opinion 2004-81, the Tax Court held that the ski-season rental of a taxpayer’s property in Truckee, California, which was held for rental and investment purposes, was not an activity engaged in for profit, even though the property was held for appreciation.

In both of these cases, the taxpayers did not rent the properties to the general public. In Vandeyacht, they rented only to friends or their adult children, and in Rivera, the taxpayers rented only to acquaintances and coworkers. The seasonal nature of the rentals and the fact that the taxpayers didn’t rent to the general public probably resulted in the Court’s bifurcation of the activity into separate rental and investment activities.

If your client's situation in Florida is similar, then you might want to read these cases to understand the Tax Court's thinking. On the other hand, if the property was rented year-round, the $16,000 reflected fair market rent, and the property was rented to an unrelated tenant, then it might be a bona fide rental.

Ksnoopytax (talk|edits) said:

10 April 2010
Thank you.

I'll take a look at the court cases. I would think the issue comes up all the time.

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