The Internal Revenue Service has issued a list of proposed regulations on real estate that could shock even the most fervent tax reformer.
The eight-page IRS bombshell appeared in the Aug. 7 Federal Register.
Among other things, it said that:
Americans who rent property to close relatives -- such as an elderly mother or a young son or daughter just out of college -- will be penalized at tax time, even if the relative was charged rental for the property at the full market rate.
Homeowners who have a legitimate secondary source of income, and who set aside a small portion of their home as an office, will not be able to deduct business-related expenses on that office -- despite a 1980 decision by the top federal tax court that says they can.
Vacation property owners who rent their units will be charged with a full day of "personal" use of the property every time they visit it without spending virtually every minute repairing it. Even if a parent who owns a cabin in the woods does spend eight hours each day fixing it up, he or she will get tagged with personal use if, for example, an accompanying 17-year-old child was not forced to work on the house for eight-hours also.
The suggested regulations affect far more than real estate, but the way: they apply to any type of nonhotel accomondation that is rented, including houseboats, recreational vehicles, trailers and mobile homes.
These are just a few of the surprises awaiting taxpayers who learn about the tough new IRS proposals.
The proposals derive from a law passed by Congress in 1976, during the waning moments of the last push for reform to plug the loopholes in our labyrinthine tax code. The IRS was supposed to issue regulations within a year of that law but only now has gotten around to publishing them in proposed form.
The rules will go into effect this fall -- and could trigger thousands of tax audits on returns beginning next year -- unless the Treasury Department is convinced by public outcry to postpone them. The IRS is taking "comments" in the form of letters and telegrams from the public through Oct. 6, so it is not too late for you to make your feelings on the subject known to the IRS.
You've heard of the "marriage tax" in the current IRS code that penalizes couples who marry but rewards those who live together unmarried. Now the country is about to get a "family rental tax" -- a penalty for providing shelter to members of the family and in-laws!
This rule, penalizing anyone who rents property to a close relative, undoubtedly is the most hard-nosed of the proposed regulations. It prohibits the owner of a house, a condominium or other dwelling unit rented to a relative -- at full market rates -- from taking the normal tax benefits associated with rental property.
Under the new IRS rules, an owner will not be allowed to deduct any more on such a property than he or she receives in rental income. The owner will be able to deduct property taxes and mortgage interst but will not be allowed to add the full extent of depreciation, routine maintenance and other customary deductions if total writeoffs exceed rental income.
The amount at stake could involve several thousand dollars a year in lost deductions in the case of a rental house or condominium in a typical U.S. metropolitan market.
In prarctical terms, this means that a person, who normally would be able to take a paper "loss" for tax purposes on a house rented to a stranger, would have to pay higher taxes for renting it to a close relative.
If the IRS meant to restrict its rule only to rentals to family members at less than the going market rate, that would be tough enough. But to discourage taxpayers from renting either full-time residences or vacation space to relatives, paying the same rate that a stranger would be charged, is downright mean.
The IRS explains tht it's merely following the sense of Congress on this whole issue -- a Congress that dates back to 1976. The law clearly distinguished rentals to relatives from rentals to others, IRS maintains. Rentals to family members are considered personal use by the property owner, even if the owner never sets foot on the place.
If you rent out property of any type, or were thinking about doing so, get a copy of IRS's Aug. 7 proposals and show them to your accountant or attorney. The rules could cost you a lot of money. They could also cost some innocent renters a family roof over their heads.