Self Rental Tax Traps - Are you in Danger? Are Your Clients?

•All audio is streamed through your computer speakers.

•There were several attendance verification questions presented during the LIVE webinar to qualify for CPE of the LIVE event only.

•For the archived/recorded version of this webinar, the link at the end of this presentation will be to final exam on the topics and learning objectives covered during this webinar plus there are also 3 online review questions to answer per hour.

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Self Rental Tax Traps - Are you in Danger? Are Your Clients?

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Presented by:Kathy Hettick, EA, ABA, ATP, RTRP Gene Bell, EA, CFP®, ATA, RTRP

National Society of Accountants1010 N. Fairfax StreetAlexandria, VA 22314

800-966-6679www.nsacct.org

Learning Objectives

Upon completion of this webinar you will be able to:

•identify taxpayer situations that are classified as Self Rentals according to §469. •list examples of the 8 most common "traps" and how your client and you, the practitioner, can avoid them.•communicate with your clients the tax implications of Self Rentals and the dangers of not reporting income correctly.

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What is a Self-Rental?

The property owner materially participates in the entity renting the property

– Income reclassified as non-passive– Losses remain passive– Credits remain passive– Activities remain passive

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Introduction – Tax Reform Act 1986

Creation of IRC §469–§469(a) - Passive losses no longer deductible–§469(b) – Losses carried over to future years

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Tax Reform Act 1986

§469(c) - Passive Activities Defined– Any Activity Lacking Material Participation– Any Rental Activity

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Tax Reform Act 1986

• §469(c)(6) – Connected to a Trade or Business• §469(h) – Material Participation Defined• §469(l) – IRS gets to write the rules -

Legislative Regulations Authorized

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Code §482

Allocation of income and deductions among taxpayers

–In any case of two or more organizations….. owned or controlled directly or indirectly by the same interests

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Code §482

Allocation of income and deductions among taxpayers

–The Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses.

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The Self Rental Rule

Treasury Regulation §1.469-2(f)(6)–Property rented to a nonpassive activity. An

amount of the taxpayer's gross rental activity income for the taxable year… is treated as not from a passive activity …

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The Self Rental Rule continued…

if the property –– (i) Is rented for use in a trade or business

activity – in which the taxpayer materially participates – §1.469–5T, yes still temporary

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Review of Concepts

Self-Rental Rule – If the shoe fits, wear it–Material Participation–Legislative vs. Interpretive Regulations–Item of Property

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Review of Concepts

Self-Rental Rule – If the shoe fits, wear it (yes, there’s more)

–Non-passive income is a separate type–Re-characterizations / Allocations

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Tax Risk #1

Income from self-rentals cannot be orchestrated to be offset by net losses from other passive activities

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Tax Risk #2

The netting of profits and losses from self-rentals is not allowed

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Tax Risk #3

• Income in excess of market rents from self-rentals can be re-characterized as dividend distribution income

• What about less than fair market rent?

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Tax Risk #4

The self-rental rule still applies even if….− owner does not have any ownership in the

leasing entity− rule is triggered if the owner is a “material

participant” in the activities of the business

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Tax Risk #5

• Limits passive activity credits• The self-rental rule only re-characterizes the

income as non-passive

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Tax Risk #6

For purposes of the earned income credit, nonpassive self-rental income remains disqualifying investment income

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Tax Risk #7

Self-rental income is not portfolio income– not available as a source of investment

income – no deduction of investment interest

expense on Form 4952

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Tax Risk #8

If an S-Corporation pays rent to an employee for the employee’s home office, the activity is classified as a self-rental under the rule

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Risk Conclusion

The self-rental rule is constitutional, was properly established and accurately reflects the legislative intent of Congress.

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Risk Conclusion

The self-rental rule applies only to the income from an item of property and not to a loss and not to the activity itself.

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Risk Conclusion

The reclassification of the self-rental income does not reclassify credits generated by the activity and is not applicable to other sections of the tax code.

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Review Questions for Self-Study CPE

For the recorded version of this webinar, now’s the time to answer the review questions.

Follow this link:http://www.proprofs.com/quiz-school/story.php?title=NTgyODEx

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Check out the Archived Webinars presented byKathy Hettick & Gene Bell

Schedule D in the Real World Schedule E in the Real WorldPreparer Penalties - Are You at Risk?

http://webinars.nsacct.org

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Thank you for participating in this webinar.Below is the link to the online survey and CPE quiz:

http://webinars.nsacct.org/postevent.php?id=10850Use your password for this webinar that is in your email

confirmation.

You must complete this survey and the quiz or final exam + review questions (for the recorded version) to qualify to receive CPE credit.

National Society of Accountants1010 North Fairfax Street

Alexandria, VA 22314-1574Phone: (800) 966-6679

members@nsacct.org

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