Wednesday, January 25, 2012

The 'Renter of my Rental is Me' Case


Taxpayer’s income from a commercial rental was recharacterized as active and was not available to be offset by passive losses. This recharacterization was upheld under the self-rent exception to the rule that rental activities are by definition passive activities. (Taxpayer rented the property to his wholly owned corp.)

Take aways:

• Taxpayer had a generic lease but the rents did not correlate to this lease and in some years the rent deducted on the corp did not match the gross rental income reported on the TP’s personal return.

• Because petitioner materially participated in the business activity of the tenant, the self-rental rule would appear to apply. It is a pretty cut and dry case.

• TP relied on the advice and counsel of a paid preparer with a suitable level of knowledge for determining how to characterize the income and therefore were able to avoid the accuracy-related penalty.

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