Landlords who want to deduct 100 percent of their rental property expenses must be sure to watch the personal use of their rental property.
In the case of Mark A. Van Malssen and Patricia D. Kiley v. Commissioner, T.C. Memo 2014-236, T.C.M., the taxpayers were limited in the amount of rental expenses that they could claim because their personal use of the rental property exceeded 14 days.
There is a section in the Internal Revenue Code that limits the amount of rental expenses that can be deducted when personal use of the rental property exceeds 14 days. When that is the case, instead of being able to deduct 100 percent of rental expenses, the owner must allocate those expenses.
The allocation percentage is derived by dividing the number of days the property was rented by the total number of days that the rental property was used. The number of days the rental property was used is determined by adding the rental days and the personal use days together.
Mark A. Van Malssen and Patricia D. Kiley had deducted 100 percent of their rental property expenses on their 2008 and 2010 jointly filed 1040 returns. In both of these years, it was determined by the facts and circumstances of the case that the personal use of the rental property had exceeded 14 days.
Therefore, instead of deducting 100 percent of their expenses, they should have allocated the expenses based on the above allocation percentage.
The issue in this case was how many personal days the taxpayers had used their rental property. The taxpayers said they used the rental property in both 2008 and 2010 for 14 days. Had this been the only personal use of the rental property, they would have been entitled to claim 100 percent of the rental expenses as a deduction.
An IRS regulation states that when the principal purpose of use of the dwelling unit is to make repairs and maintenance, those days do not count as personal days. Whether the principal purpose is for repairs and maintenance or for personal use is determined under a facts-and-circumstances test.
A number of times over the course of 2008 and 2010 Mr. Van Malssen made the 350-mile trip from his home to the rental property in South Carolina. If the purpose of the trip is deemed to be primarily business, then the travel days are not considered to be personal days. If the primary purpose of the trip is personal, then those travel days are considered to be personal days.
The travel days were caused because it took the whole day for Mr. Van Malssen to drive from his personal residence to the rental property.
Mr. Van Malssen kept very detailed logbooks regarding his personal and business use of the rental property. The court used those logbooks when determining whether the different travel days counted as personal use days.
When traveling to the rental property, if more than 50 percent of the days spent at the rental property are related to making repairs and maintenance, then all of the days spent at the rental property and the one day of travel time are all deemed to be nonpersonal use.
But if less than 50 percent of the days spent at the rental property were related to repairs and maintenance, then the one day of travel time is deemed to be personal use time.
Because the court ruled that some of the travel time from the main residence to the rental property was properly counted as personal time, the taxpayers exceeded 14 personal use days in both tax years 2008 and 2010.
Because of this fact,the taxpayers were required to allocate the rental property expenses instead of deducting 100 percent of them. The court denied some of the rental expenses and a deficiency judgment was asserted against the taxpayers.