Can I rent to myself?


D

dbu

I am self employed. A few years ago I purchased a property
with two separate buildings, a house and a fully finished
detached 'garage' which I use 100% for my business. I have
been claiming a rent expense on my Schedule C for the
'garage' and then showing a personal rental income for the
same amount on Form 1040. The reasoning behind this was to
recoup some disallowed Invesment Interest Expense
accumulated a few years ago in the stock market. I have
been claiming the interest expense against the rental income
on Form 4952 and then deducting it on Schedule A.

An IRS tax auditor has taken issue with this practice citing
Sec 162 of the tax code viz. A deduction is allowed for:
'rentals or other payments required to be made as a
condition to the continued use or possession, for purposes
of the trade or business, of property to which the taxpayer
has not taken or is not taking title or in which he has no
equity.'

Essentially, he says I cannot rent to myself. Is this a
correct interpretation on his part? I don't want to get
into the Business Use of Home stuff or depreciation, etc. I
just wanted to recoup the investment interest expense.

Any thoughts? He wants to charge me 20% penalties &
interest for the past 3 years as well.

David
 
P

Paul

dbu said:
I am self employed. A few years ago I purchased a property
with two separate buildings, a house and a fully finished
detached 'garage' which I use 100% for my business. I have
been claiming a rent expense on my Schedule C for the
'garage' and then showing a personal rental income for the
same amount on Form 1040. The reasoning behind this was to
recoup some disallowed Invesment Interest Expense
accumulated a few years ago in the stock market. I have
been claiming the interest expense against the rental income
on Form 4952 and then deducting it on Schedule A.

An IRS tax auditor has taken issue with this practice citing
Sec 162 of the tax code viz. A deduction is allowed for:
'rentals or other payments required to be made as a
condition to the continued use or possession, for purposes
of the trade or business, of property to which the taxpayer
has not taken or is not taking title or in which he has no
equity.'

Essentially, he says I cannot rent to myself. Is this a
correct interpretation on his part?
For the most part, he is correct.

You can take a deduction as a home office under those rules
(and those seem to apply here).

It ~may~ be possible to claim a partial deduction for rents
paid from your self-employment on property held jointly, by
a spouse as an example. Seem to recall a court case on the
matter a while back.
I don't want to get into the Business Use of Home stuff
or depreciation, > etc. I just wanted to recoup the
investment interest expense.
Well, even if.........the investment interest is probably
passive, and your rental to yourself is not.......so.......
Any thoughts? He wants to charge me 20% penalties &
interest for the past 3 years as well.
I bet.
 
Ad

Advertisements

H

Harlan Lunsford

dbu said:
I am self employed. A few years ago I purchased a property
with two separate buildings, a house and a fully finished
detached 'garage' which I use 100% for my business. I have
been claiming a rent expense on my Schedule C for the
'garage' and then showing a personal rental income for the
same amount on Form 1040. The reasoning behind this was to
recoup some disallowed Invesment Interest Expense
accumulated a few years ago in the stock market. I have
been claiming the interest expense against the rental income
on Form 4952 and then deducting it on Schedule A.

An IRS tax auditor has taken issue with this practice citing
Sec 162 of the tax code viz. A deduction is allowed for:
'rentals or other payments required to be made as a
condition to the continued use or possession, for purposes
of the trade or business, of property to which the taxpayer
has not taken or is not taking title or in which he has no
equity.'

Essentially, he says I cannot rent to myself. Is this a
correct interpretation on his part? I don't want to get
into the Business Use of Home stuff or depreciation, etc. I
just wanted to recoup the investment interest expense.
Yes, he's right on that score. Old principle is that you
can't do business with yourself, much less turn a profit or
loss.
Any thoughts? He wants to charge me 20% penalties &
interest for the past 3 years as well.
Depends on what kind of penalties. If it just failure to
pay penalties, not much to get out of (note; OP said 20%
penalties, meaning penalties just happen to amount to 20%
over years.)

If negligence penalty however, you might have a leg to stand
on, if you can convince him you were not neglicence, much
less intended to evade the law.

ChEAr$,
Harlan Lunsford, EA n LA
Mon, 13 Dec 2004 19:47:00
 
C

Christopher Green

bu said:
I am self employed. A few years ago I purchased a property
with two separate buildings, a house and a fully finished
detached 'garage' which I use 100% for my business. I have
been claiming a rent expense on my Schedule C for the
'garage' and then showing a personal rental income for the
same amount on Form 1040. ...
Essentially, he says I cannot rent to myself. Is this a
correct interpretation on his part?
This is a well-known prohibition of long standing. It has
the purpose of preventing exactly the sort of self-dealing
you tried.

Creative accountants have tried all sorts of ways to get
around it. The usual strategy involves transferring the
property to somebody who is not you, such as a trust, and
leasing it to somebody who is not you, such as a corporation.
The IRS regularly attacks such transactions as having no
business purpose. A doctor named Lerner was successful, but
many who have tried similar approaches were not. See a
commentary on Lerner's case, online at
www.fpanet.org/journal/articles/1979_Issues/upload/9399_1.pdf
 
T

Tom Healy

Essentially, he says I cannot rent to myself. Is this a
correct interpretation on his part? I don't want to get
into the Business Use of Home stuff or depreciation, etc. I
just wanted to recoup the investment interest expense.

Any thoughts? He wants to charge me 20% penalties &
interest for the past 3 years as well.
Unfortunatelyl, he's correct. You'll lose the investment
interest deduction, and can only claim the normal office in
home deductions, resulting in an inc rease in SE tax as
well.

Now if you are married and your spouse owns half the
property, you should be able to keep half of the rental
expense/income (her half).

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: (e-mail address removed), since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772
 
Ad

Advertisements

M

MTW

dbu said:
Essentially, he says I cannot rent to myself. Is this a
correct interpretation on his part?
Yes.

Any thoughts?
Next time, may I respectfully suggest that you seek
qualified professional advice before trying to do something
"clever." You might also benefit from a professional review
of the proposed audit settlement and penalties.

MTW
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top