If you can’t get a tenant in 30 years, maybe you’re doing something wrong. A Minnesota architect named Meinhardt bought a farmstead in 1976. He rented out the cropland to neighboring farmers. He looked for a tenant for the farmhouse, too. He was still looking in 2007, but never managed to find a cash-rent tenant for the house.
Though he never reported any rental income on the house, he paid for house expenses, including repairs, insurance supplies and utilities, deducting them on Schedule E on a joint return. The deductions totaled $42,694 from 2005 through 2007.
The IRS decided that the architect failed to demonstrate enough of a profit motive to take the deductions. The taxpayer argued that the expenses were actually part of renting the farmland, which the IRS agreed was a for-profit enterprise. The taxpayer also argued that he really tried to rent the house, but it just didn’t work out.
The Tax Court sided with the IRS, and now so has the Eighth Circuit. First addressing the argument that the house expenses should be lumped in with the land rental:
They offered no evidence they ever tried to rent or lease the farmhouse and farmland together. Donald testified the farmhouse could be parceled off and sold separately from the crop and pasture land. The Tax Court did not clearly err in finding that the Meinhardts treated the farmhouse separately from the leased farmland, which was admittedly a business activity, and therefore expenses related solely to the farmhouse could not be deducted as ordinary and necessary expenses of the leased farmland activity.
The hard-luck landlord defense didn’t fare any better:
The Tax Court found that the Meinhardts did not prove the farmhouse was held for the production of income during the tax years in question because they “did nothing to generate revenue during the years in issue [and] had no credible plan for operating it profitably in the future. There was no affirmative act (renting or holding for appreciation in value) to demonstrate that the property was held for the production of income.” (T.C. Memo. citations omitted.) This finding, too, was not clearly erroneous. Without question, the Meinhardts’ expenditures for substantial repair and improvement of the farmhouse over many years, including the tax years in question, increased the value of that property. But they failed to prove that they were holding and improving the property to profit from its rental or its appreciation, as opposed to improving it for personal use.
The reasonableness of this alternative personal-use explanation for the expenditures in 2005-2007 was rather dramatically confirmed when they sold their home in suburban Minneapolis and moved into the farmhouse in 2010.
The Moral? If you hold property for years without generating income, you better have pretty good evidence that you have worked hard to rent it if you want to deduct the costs on your Schedule E. If it’s a rental home that you also use on weekends, you’ll have to work harder. If you hold it for 30 years without a cash tenant and then move in, your battle to convince a judge of your profit motive might be hopeless.
Tax Court case: Meinhardt, T.C. Memo. 2013-85.
ISU Center for Agricultural Law and Taxation Annotation: No Deduction For Farmhouse-Related Expenses.
William Perez, Repaying the First-Time Homebuyer Tax Credit. The first misbegotten version of the misbegotten First-Time Homebuyer Credit was actually more a loan than a credit, and it must be repaid over 15 years. Some of them will be repaying long after the home was sold, or foreclosed
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Peter Reilly, Montana Catches Non-filer With Property Tax Break. When you claim a homestead exemption on your property taxes somewhere, that place might just decide that you should pay resident income taxes.
Phil Hodgen ponders the Valuation date for expatriate’s balance sheet. When you expatriate, there’s a tax for that.
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