Mixed use of vacation home requires planning to avoid disallowance of related deductions
Article Abstract:
Itemized deductions are allowed for mortgage interest and taxes on vacation properties used solely for personal purposes by the owner. Expenses such as utilities, repairs, rent paid, or depreciation of property are not deductible when the home is used for personal purposes, but are allowed if the home is used for the sole purpose of producing income. The rules for homes that are used for both income and personal purposes are somewhat more complicated. If the home is used by the taxpayer and rented for less than 15 days during the tax year, deductions attributable to the rental are not allowed, and the income derived from the rental is not taxable. If the home is used for personal purposes for less than 15 days during the tax year, the home is not considered a residence. Exceptions to these rules and alternate methods of allocation are discussed.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1987
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Passive loss rule substantially restricts utility of tax-sheltered investments
Article Abstract:
Section 469 of the Tax Reform Act of 1986 (TRA) changes the rules regarding passive losses. This is considered to be the most potent curb on abusive tax shelters ever passed into law. Section 469 disallows losses and credits from passive trade or business activities to the extent that they exceed aggregate passive income. A passive activity is defined as any trade or business in which the taxpayer does not materially participate. Losses from non-participatory investments such as limited partnerships cannot offset income from salary or portfolio income, because portfolio income is not considered to be passive income. Rental activity is considered to be passive income, even if the taxpayer materially participates in the activity. The rules for material participation, tax credits, and suspended losses and credits are discussed.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1987
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Some planning is available to mitigate the effect of the passive loss rules
Article Abstract:
The Tax Reform Act of 1986 has restricted the use of allowances for passive losses to offset income. Passive losses may only be used against passive income, for the most part, although there are exceptions to this rule. Closely held corporations may use passive losses to offset net active income, but not portfolio income. Individuals can offset up to $25,000 of non-passive income against losses and credits from rental activities in which the individual actively participates, but all rental activity and losses must be netted. Certain types of investments in low-income housing are excepted from the new passive loss rules. The implications of these new rules for tax and investment planning are discussed.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1987
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