Discussion:Sale of Vacation home with Both Rental and Personal Use

The taxpayer has owned a rental property for a number of years. Up until the last two years it was always a rental with very limited personal use days. The personal use days did not exceed the greater of 14 days or 10% of the days rented. However, the past two years it is more a vacation home with both rental and personal Use. The property had personal use that exceeds the greater of 14 days or 10% of rental days and the rental use exceeded 14 days.

He plans to sell the property at a loss. Since it was used for more than 14 days in the past two years does it make it a personal residence and the loss is now non deductible?

Thank you in advance.

Another take is to be aggressive and treat the whole thing as a rental loss since personal use was minimal.

In any event, it's an interesting question and I'd like to hear what others have to say.

As far as I know, neither the IRS nor the courts have applied the business/personal use allocation by considering such use over the entire ownership period. However, such an allocation is advocated in the article "Taxation Of Timeshares - Acquisition, Use, And Disposition Issues", 27 Journal of Real Estate Taxation 301, 2000 WL 1679004 (W.G.&.L.). In the article, the authors (Caroline Craig & Suzanne Luttman) state:

"On disposition, the allocation of the sales price and original cost between personal and rental uses should be performed based on the relative number of rental versus personal days during the timeshare ownership period. In the event that both portions of a mixed-use timeshare interest are sold at a loss, the loss on the personal-use portion is a nondeductible capital loss. The loss recognized on disposition of the rental-use portion of the asset is initially characterized as a Section 1231 loss, but may eventually be treated as an ordinary loss for tax purposes, depending on the outcome of the netting process required under Section 1231."

On an unrelated note, it's important that the taxpayer not use the property too much personally in the year of the sale, the year prior to the sale (and maybe even the year prior to that). If this happens, IRS could assert that the property has been converted to personal use (making any loss non-deductible). Clients should be made aware of this fact when they acquire the property.

Also, I think the mixed-use auto analogy is on-point. Here, you have 1 asset that is being used for business and personal purposes. In my mind, this isn't all that different than a vacation home.

And finally, any days rented to family members at fair rent are treated as personal days for 280A categorization purposes. However, these days are not counted as personal days when dividing expenses between rental and personal under 280A. As such, my feeling is that these days should not be treated as personal days when running the gain/loss on sale calculation.