Dealing With Self-Rental Property Rules

Posted by Lee Reams Sr. on

Self-rented property - Code 469 includes a self-rental recharacterization rule that applies to taxpayers who rent property to a trade or business in which they materially participate, with the result that net rental income from an item of property is converted from passive to non-passive but net rental loss from an item of property remains passive. (Reg. 1.469-2(f)(6))

Example – Self-Rental Recharacterization: Mike is the sole shareholder in a C corporation that operates a restaurant in which he materially participates and he, as an individual, owns the building in which the restaurant business is located. He had net rental income of $35,000 from the rental in the same year that he has losses of $15,000 from a limited partnership in which he doesn't materially participate. Because Mike materially participates in the restaurant business, the net rental income is recharacterized as not from a passive activity. As a result, he cannot offset the $15,000 loss from the partnership against this rental income. 

This rule recharacterizes rental income from an item of property, rather than from an activity, even where multiple properties are properly grouped as a single economic activity under Reg § 1.469-4(c)(1). (Carlos, Tony R. (2004) 123 TC 275)

Where a dwelling unit is used by the taxpayer as a residence, and is rented out for less than 15 days during the tax year, then the rent isn't included in the taxpayer's gross income and no deduction due to the rental use of the dwelling unit is allowed, other than the normal interest and tax deductions on Schedule A. (Section 280A(g))