Discussion:Partner Section 179 Expense Deduction

However, Sec. 179(d)(1) and 50(b) exclude any property used in connection with the furnishing of non-transient lodging.

I would not have claimed the 179 either because I didn't consider Commercial rental an active trade of business so Riley2 is saying that since it is commercial property (nonlodging facilities) and NOT residential rental then the 179 may be taken?

Wes, so you would not take the 179 on a commercial rental property because of 469?

And Riley2 would because it is not residential rental?

My view, No section 179 for rental property-If I remember the rules properly--

Section 179(d)(1)(c) limits the deduction to assets aquired for use in the active conduct of a trade or business. Most of us would not consider ownership and management of real property as a trade or business. However according to my research service (BNA Tax Management Library) "Ownership of property is a trade or business if the taxpayer's activities go beyond mere collection of income, investment management and the provision of customary tenant services." The example given is of a doctor who owns an apartment building. The doc spends 10 hours per week supervising repairs, screening tenants, doing landscapting, cleaning common areas, etc. So, if the rental activites constitute a trade or business, then Section 179 would be allowed.

Based on this analysis, it would not seem to be relevant as to whether the rental were commercial or residential in determining whether Section 179 could be taken, but rather whether the rental activity rose to the level of a trade or business.

But if the determination is made that the partnership does have a trade or business, wouldn't that make profit from the rental activities also subject to SE tax??

IRC 50(b)(2) kicks out the frig for a 179 deduction on residential property, yet, if commercial rental this is ok? I keep looking at 179(d)(1)(C) that says "...for use in the active conduct or a trade or business." Unless, rental of commercial real estate was your profession, and therefore on Sch C, how do you, or where do you, report the 179 deduction?

Incidentally, I agree that the common-law definition of a trade or business for tax purposes is hazy at best. I believe the courts have ruled that rental activities can be treated as either property held for the production of income or property held in a trade or business. See for example E.R. Curphey, 73 TC 766 wherein the Tax Court ruled that managing six rental properties rose to the level of a trade or business.

But when, then, does the real estate rental activity rise to the level of a trade or business? Do you take the position that any property that meets the definition of Sec 179 property (via Sec 50(b)) is always allowed if the property is commercial?

when does renting a commerical property rise to the level of a "trade or business for purposes of the 179 deduction?

1) I have a full time non real estate job, I own and rent one commercial bldg with one unrelated tenant? Qualify for 179? 2) same as 1, but the blding has 10 tenants? Qualify for 179? 3) What if you hire a commercial leasing agent to handle tenants, rent collections etc...similar to residential property, Qualify for 179?

So, is it the conclusion then that a TP can take 179 on commercial rental property irrespective of the TP's involvement and or whether or not the TP owns one small commercial bldg with one tenant or many bldging with many tenants? The backup for that belief is that commercial rental property is not specifically mentioned in 50(b) and that owning one small commercial blding qualifies under 179 as a trade or business?

I just want to make sure I understand the reasoning to arrive at the conclusion

And, secondly, unsupported comments in a discussion like this are not particularly helpful. If you believe that the determination that a rental property classification as a trade or business is not what determines whether Sec 179 applies, how did you arrive at this opinion? Please cite chapter and verse so we can know how you have come to your conclusion.

The Small Business Jobs Protection Act of 1996 added the following to the list of property not qualifying for the 179 expenses election:

Property used in connection with furnishing lodging.

Dictum from the practioner note in my source book states 

"This can be a troublesome issue. property used in the living quarters of a lodging facility, including furn and appliances, is considered as used predominantly to furnish lodging. The term lodging facility includes an apartmenr house, hotel, motel or any other facility where sleeping accomadations are provided.

However, property used by a hotel, motel, inn,or other simialr establishment is not considered used in connection with the furnishing of lodging if more than half of the living quarters are used to accommodate tenants on a transient basis (rental periods of 30 days or less) hey jd look a code cite :) See Code section 50(b)(2)(B) and treas reg 1.48-1(h).

Result. Property used by a hotel or motel in connection with the business of furnishing lodging for transients is eligble for 179 expensing. Such propery would include items such as TVs, radios, phones, clocks, hair dryers (wow) and furniture."

Also reg 1.179-l(i)(1) notes a lessor that merely holds property for the production of income does not meet the requirements of section 179. So that amongst other seminars and 30 years of just hanging out etc is why I dont take 179 for residential or commercial rentals without extra services or transient rentals. But I enjoy everyones opinion with and without cites. ps jd I have noticed some of your answers dont have cites even though they may be correct.

So jd and dennis heres the deal you get my opinion for free (I will throw in cites if it doesnt take long) but if you want me to support my opinions without cites listed etc I charge $250 an hour. If you want CAPs, proper punctuation and spell checks keep in mind that takes longer and you have to pay for it. I ma not the best typist. And if you disagree with me make sure you add a reason why not because I just didnt support my opinion. The first hour is on me. bye :)

The questions we are wrestling with are specifically:

 1) Can (and at what point) a commercial rental activity rise to the level of trade or business?

 2) If it does, is it now subject to SE tax?
 3) If it is not subject to SE tax does that mean the §179 deduction is unavailable?

Since I have answered the basic question (obviously not to dennis' understanding) I will tackle the new s/e question.

Real estate rental income where the taxpayer isnt a real estate dealer and performs no personal services for his tenants. Such income isnt included in net earnings form s/e tax. holbrook, richard s tc summary opinion 2001-135

Rental income and deductions attributable to r/e and pp rented with the r/e are not included in the computation of s/e income of an individual who holds the r/e for investment or speculation. code 1402(a)(1) reg 1.1402(a)-4(a) rr 55-559

If the ind. is a r/e dealer (that is one who holds r/e for the purposes of selling it to customers for profit in the normal course of business), the rents from the property are includible in net earnings forms s/e ( cites to numerous I guess you have to trust me dennis). If the dealer holds properties for sale and investment, only rents from the latter are excluded form net earnings from s/e.

IF the payments are made for rooms or other space where services (eg maid service) are also rendered to, and primarily for the convenience of, the occupant, the payments paid for rooms in hotels, boarding houses, apartment houses furnishing hotel services, tourist camps or tourist homes, or for space in parkings lots, warehouses or storage garages are not rentals form real estate and are subject to s/e tax. reg 1.1402-4(c)(2)

Insubstantial and routine services provided by the taxpayer to tenant/occupants wont jeopardize the exclusion for rentals from net earnings form s/e. Services that landlords furnish under most leases, such as heat, light, cleaning of public halls ,trash collection, etc, arent services primarily for the occupants convenience. reg 1.1402(a)-4(c)(2)

I have lots of examples of services provided in rental activites that met or failed to meet the "substantial services" test. But my fingers are tired. Tax research programs are a great service.

Anyways I am sure this will answer the s/e question or at least you all can now make your own determination. Dennis? well maybe not.:) I would love to see some bios on you folks.

Anyways it is sunny and beautiful here in Boston. I leave at 3 pm for a HS LAX game. the rest of you have a nice day. :) bye

As Dennis has stated, the issue of transient lodging was never the key issue in the question being discussed above. Here is a summary of the flow of the discussion.

1. JR said 179 is not available for rental assets.

2. Riley suggested the Sec 179 can be claimed on a commercial rental property.

3. You pointed out that 179 can only be claimed on an active trade or business.

4. I pointed out that a rental activity may, at times, be considered and active t or b. But I expressed concern that if activity were determined to be active t or b and thus eligible for claiming 179, that SE tax would result.

5. Riley pointed out that a business could be an active t or b without necessarily being subject to SE tax. He pointed out that rental of r/e that is a trade or business is not subject to SE tax unless extraordinary services are provided. Having read Sec 1402(a), I concurred, (having learned something new).

6. I raised the question, when does a rental activity rise to the level of a t or b so that Sec 179 may be taken.

This is the point at which you commented and I took you to task. I am sorry if you were offended by my response. But at this point, the disagreement seems to be: WesR seems to say that a rental activity ONLY rises to the level of a t or b when extraordinary services are provided. If that is the case, SE tax will kick in and Sec 179 will be allowed. Riley seems to take the position that a rental activity may be a t or b WITHOUT providing "extraordinary services" and hence, Sec 179 will be allowed for COMMERCIAL properties without SE tax coming into play.

I participate in this forum for two reasons. Sometimes, my tiny bit of knowledge might be of assistance to someone and sometimes I might learn something from others. So, can we call a truce?

Riley has given his opinion. JD seems to be leaning in that direction. Wes disagrees, although nothing he has said seems to substantiate that opinion. And Mt and I would just like to know.

we can have a truce if I can still get a zinger in once in a while when it is deserved? although i have to be the judge and jury. :) ps i hope you have noticed i am trying to improve my readability (except here). bye

I am thinking you agree (maybe?) that you CAN'T take 179 on commercial rentals.

Riley's oringinal stmt on April 25 said "I see no problem with claiming Sec. 179 on stoves and refrigerators in commercial buildings. Thus, if an office complex places 35 refrigerators into service during the year, all 35 refrigerators should qualify for Sec. 179. However, Sec. 179(d)(1) and 50(b) exclude any property used in connection with the furnishing of non-transient lodging."

If I were preparing a return where 35 frigs were placed in a commercial bldg, I would NOT have taken 179 on the frigs because it had to do with rental property not a trade or business.

Is this right or wrong? Or just subject to the interpretation of 50(b) and trade or business under 179?

So as far as rileys comments, here goes. If the rental of commercial and/or resditial property (in my mind and now mtm seems to understand) meets the definition to make it subject to s/e then i will take 179. if it doesnt i dont.

Can i be any clearer? mtm i agree with you. Yes yes yes. Unless dennis somehow figures out "I agree" means "I disagree" again. Sorry JD he just leaves himself wide open and I couldnt resist. Will try to be nicer but sometimes it is hard. bye again.

ps JD I dont much care about awards i do this for the fun and pay. will check out bio but seems like there was nothing there last time I looked. I like you now. hugs and kisses (hope you're not a guy) bye

Trade or Business Requirement Section 195 permits a 60-month write-off of start-up costs only if they are related to the investigation or creation of an active “trade or business” (TOB). At the outset, this requirement precludes deduction of costs attributable to an “investment.” Operating income-producing real estate is generally considered to be an active TOB. The Senate Finance Committee Report in 1980 stated that “In the case of rental activities, there must be significant furnishing of services incident to the rentals to constitute an active business ... Thus, a rental activity is not considered to be an active trade or business solely because deductions attributable to it are allowable in computing adjusted gross income ... In general, the operation of an apartment complex, an office building or a shopping center would constitute an active trade or business.” Robert Klein, CPA - Real Estate Monitor, Winter 2004

 Apparently the Senate Finance Committee agreed with Riley in 1980.

Regarding punctuation and spelling, Wes & I made up a long time ago. He tried to give me hugs and kisses, but I politely informed him I am not that kind of guy.  :)

As for me, definitely not one of the smartest tax guys that lurks here, which is why I'm here, always questioning to the max, expecially that which isn't black and white.

Happy Memorial day!

Anyway, thanks for the feedback. So far, over the past 12 years, I've been 100% successful in doing sec 179, and never audited, but the tide is changing here and things may change, who knows.

In simple terms, Sec. 179(d) disallows Sec. 179 on certain trade or business property.

For example, would you claim Sec. 179 on equipment leased by an individual in his trade or business to another taxpayer under a one-year NNN lease? No, of course not since this would be a violation of the Sec. 179(d)(5) non-corporate lessor rules. Another example, would you claim Sec. 179 on a window air conditioning unit that is classified as personal property under local law? No, obviously not since that would be a violation Sec.179(d). Another example, would you claim Sec. 179 on trade or business property located outside of the United States? No, hopefully not since this would be a violation of Sec. 179(d). One final example, would you claim Sec. 179 on trade or business property leased to a tax-exempt organization or governmental entity? Hopefully not, since this would also be a violation of Sec. 179(d).

No, the pubs do not reflect IRS policy. The pubs don't even present a reasonable facsimile of the law. They are merely non-citable summaries of certain aspects of the law. The statute reflects the law as enacted by Congress and the Treasury Regulations reflect IRS policy.

You mention that "so many of us are questioning" Sec. 179(d)(1). I don't know of anyone who is questioning Sec. 179(d)(1). It has been in the statute since January 1, 1991 and I don't know of any movement to remove it from the statute.

I think that you are telling me that you have been ignoring Sec. 179(d)(1) and 50(b) for the past 12 years. I don’t doubt that at all, but that doesn’t mean that your luck will hold out for another 12 years.

I've just gotten back into public accounting after a 10 year absence from 1995 to 2005, so I haven't really been getting away with a whole lot. Anyway, as we say here in CA, you are one sharp "dude" and thanks for setting me straight.

Steve Wheeler Santa Barbara, CA

One thing I might add that I don't think was brought up above is PLR 9126014 3/29/91, relating to a 1990 tax year, which among other things asked whether "net profit or loss from Taxpayer's active conduct of rental real estate activities" is "includible for determining...Taxpayer's aggregate amount of taxable income from the active conduct of any trade or business under section 179(b)(3)(A) of the Code." Although it's a PLR which by its terms cannot be cited as precedent, I like it better than the committee report because it specifically references section 179 (the committee report related to 195).

As to this issue, the IRS concluded that "that for purposes of section 179(b)(3)(A) of the Code, the computation of the 'aggregage amount of taxable income' of Taxpayers...includes ... net profit and loss from Taxpayer's conduct of rental real estate activities, provided it is determined that Taxpayer's involvement constitutes active conduct of a trade or business." To the extent that a PLR can settle it, and given that the flush language of 179(d)(1) raises additional issues for residential property, to me that at least settles it for commercial realty.