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Archive for October, 2012

[Ed note: WS+B Tax Supervisor Sara Palovick stops by to warn taxpayers of a trap for the unwary: the self-rental rules of Section 469. Now, on to Sara: ]

Taxpayers must be aware that if they have self-rental activities with net income, the income from these properties will be recharacterized as nonpassive income under Reg. 1.469-2(f)(6). Self-rented property is property that is rented or used in a trade or business activity in which the taxpayer materially participates.

To illustrate, if individual B is a passive investor in a limited partnership that allocates to B a $10,000 loss, B can only use the loss to the extent he has passive income from other sources. In an attempt to generate passive income, B rents a building he owns personally to an S corporation in which B materially participates, generating $10,000 of rental income.

Though the default rule of Section 469 requires treating all rental activity as passive, the self-rental rules trump this general requirement and treats B’s $10,000 of rental income as nonpassive. As a result, A cannot offset the $10,000 passive loss from his limited partnership with the $10,000 of rental income.

Self-rental rules recharacterize rental income by items of property, rather than activities. In Joseph Veriha, 139 T.C. 3 (2012), the Tax Court reclassified income from each tractor/trailor owned by the taxpayer into separate items of property, causing any rental income to be classified as nonpassive while any rental losses retained their passive nature.

The self-rental rules apply regardless of whether the entity to which the property is being rented is a C corporation, S corporation, or partnership. As a result, any time an individual owns property that is leased to an entity in which the individual materially participates, the rental income may be recharacterized as nonpassive income. Having a bona fide business purpose does not eliminate the application of the self-rental rules. Regardless of the business purpose and fair market value of the rent, the court has ruled that the recharacterization rules apply. The only exception to the self-rental recharacterization rules are for binding written rental contracts that were entered into before February 18, 1998.

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Over at Forbes: I’m doubtful Maurice Jones Drew would welcome the chance to pay a 50% tax rate.

http://www.forbes.com/sites/anthonynitti/2012/10/29/one-reason-the-nfl-will-never-permanently-relocate-a-team-to-london-the-u-k-s-tax-treatment-of-nonresident-athletes/

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Posted over at Forbes. Download away.

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Over at Forbes, I’m counting down the Top 10 Tax Cases of 2012. First up, the IRS takes aim at the wacky tobacky.

http://www.forbes.com/sites/anthonynitti/2012/10/25/the-top-ten-tax-cases-of-2012-10-the-irs-wages-war-with-the-medicinal-marijuana-industry/

 

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Over at Forbes, I give a quick look at the tax aspects in President Obama’s recently released “A Plan for Jobs and Middle Class Security.”

http://www.forbes.com/sites/anthonynitti/2012/10/24/president-obama-releases-agenda-for-a-potential-second-term-dissecting-the-tax-aspects/

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Posted over at Forbes:

http://www.forbes.com/sites/anthonynitti/2012/10/23/new-york-court-of-appeals-lap-dancing-is-not-an-art-form-is-subject-to-sales-tax/

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Posted last night at Forbes.

http://www.forbes.com/sites/anthonynitti/2012/10/23/what-tax-changes-are-in-store-for-small-business-owners/

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Over at Forbes:

http://www.forbes.com/sites/anthonynitti/2012/10/22/uci-bans-strips-lance-armstrong-could-armstrong-next-be-forced-to-repay-previously-earned-winnings/

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Latest on Forbes from this weekend. On a related note, they asked me to join twitter to help build a readership, and this column triggered my first ever twitter war with a reader. Which, by the way, was every bit as fun as it sounds.

Oh, and you can follow me on twitter @nittigrittytax

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Latest on Forbes:

http://www.forbes.com/sites/anthonynitti/2012/10/19/tax-court-spec-home-that-was-never-built-was-not-a-trade-or-business/

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