The Internal Revenue Service has made it clear that, a congressional resolution notwithstanding, it will deny certain business tax deductions to taxpayers who rent homes to family members.
Current tax law is quite specific on this point, the IRS says, and until Congress changes the law, the agency will enforce it.
Congress earlier this month approved a resolution meant to allow all business tax deductions for home rentals to family members. The resolution prohibits the IRS from using any appropriated funds to implement or enforce an IRS rule proposed in August on the issue.
But IRS has rejoined with a "reminder" that, while the agency's rule might be defunct, the tax code itself remains.
"It's not something we pulled on the taxpayer out of thin air," IRS spokesman Rod Young said.
While conceding that the 1976 tax provisions in question may not have been written carefully enough, Members of Congress contend that they never intended to penalize people for renting primary residences to a parent or child. The idea was to crack down on abuse of vacation homes as tax writeoffs by the rich, they say.
The 1976 law limits tax deductions when a taxpayer makes personal use of a rental property for more than 14 days a year or for more than 10 percent of the time it is rented, and personal use includes that by certain family members such as parents and children.
Congress still has another chance this year to change the law during its lame-duck session, and congressional sources say it probably will.
Rep. Joseph Fisher (D-Va.) has an impressive cosponsorship list on a bill to allow all business tax deductions for family rentals as well as for rentals to strangers, and Sen. William Roth (R-Del.) plans to offer companion legislation in the Senate when Congress returns.
The issue involves only taxpayers who could claim more tax deductions on a rental property than they get in income on the property. The limits apply to business deductions -- such as for maintenance, operating expenses and depreciation -- which exceed the rental earnings and which, if allowed, would be used to offset income from other sources.
The IRS says that its policy on rentals to family members was not changed by its August rule proposal and that the same policy has been included in its tax guides since the 1976 Tax Reform Act was passed.
But the issuing of the rules brought attention to the policy, and it then was written about in the U.S. press. The first story on the subject to attract national attention was by Kenneth Harney who discussed it in his column for The Washington Post.
Congressional offices report they were inundated with mail on the issue -- partially, according to one Senate staff aide, because of its being dubbed the "family rental tax" controversy.
If the House manages to approve the Fisher bill by the end of the session, the Senate probably can, too, the aide said. Otherwise, the change is likely to go through in the next Congress.
In the meantime, the IRS says its interpretation of the law for purposes of enforcing the rental tax provisions essentially will be the same as it has been and would be under the quashed rules.