Congress and the Treasury Department are ready to make key changes in the controversial "family-rental tax," vacation home and office-in-the-home sections of the U.S. tax code.
But the news of their policy shifts evidently isn't getting out to the local offices of the Internal Revenue Service. Agents of the IRS continue to hound homeowners with audits and threats about back taxes, simply because they rented a house at fair market rates to their relatives.
Inasmuch as hundreds of thousands of real estate owners will be directly affected by the changes under way on Capitol Hill, here's a brief update on what's happening.
Regarding the so-called "family-rental tax": If you're worried about renting any type of property to a relative--whether a vacation home, a condominium apartment or a single-family house--you can breathe easier. Tax relief is on the way.
The signs are now strong that Congress will pass legislation late this year or early in 1982 removing the former tax penalties against rentals to family members. The signs are also good that the changes will be retroactive to 1976, and that the Treasury Department won't fight the reforms.
The "family-rental tax," in plain English, denies a property owner his or her normal, full deductions if the real estate happens to be rented out to a relative.
For example, if an owner of a condominium rents it out to his mother and father--even at prevailing market rents--he gets penalized every year at income-tax time. He cannot take deductions beyond the rental income his parents paid him during the year. In other words, he can't take a "loss" for tax purposes.
On the other hand, if he rented out the same condo to total strangers, the owners could take unlimited deductions for depreciation, repairs, maintenance, condo association fees, mortgage interest and property taxes. The inequity in the federal tax code, first highlighted in this column last year, has prompted a wave of bipartisan reform bills on Capitol Hill. The House Ways and Means Committee held hearings on six of the bills last week. Staff members of the committee confirmed after the hearings that it's now all but certain that the "family-rental tax" will be repealed by Congress during the coming months.
What's up in the air, they say, is the precise timing. Corrective legislation might be tacked onto the Reagan administration's forthcoming omnibus "second tax bill," expected from the White House shortly. Or the family-rental tax bill could be pushed to a floor vote independently.
The latter course would provide the speedier action and quicker relief. The President's omnibus legislation will take months of debate, and probably won't be enacted until the spring of 1982.
Meanwhile, homeowners continue to be hit with audits by IRS offices at the local level. One such case was detailed in an Oct. 17 letter from Charles T. Hoppe, a San Jose, Calif., homeowner, to Sen. William Armstrong (R-Colo.). Armstrong is a member of the Senate Finance Committee and a chief sponsor of legislation to repeal the family rental tax.
Hoppe, a businessman, recounted how he tried to help his wife's parents--both retired and in their late 70s--two years ago. The elderly couple had bought a modest retirement home, but began experiencing financial difficulties because of unexpected health expenses and the rising costs of maintaining their home. They didn't want to sell their house, but they could no longer afford to live in it.
Hoppe decided that one way he could assist his in-laws would be to purchase their house and lease it back to them. Hoppe was aware, as he wrote Armstrong, that "the IRS is very suspicious of transactions between relatives." So he "made certain that all aspects of the sale and rental were at fair market value."
The transaction would give his in-laws the security they needed, he wrote. It would also make a reasonable investment for Hoppe, figuring in "the normal deductions" for maintenance, depreciation, property taxes and mortgage interest available to owners of rental real estate.
What Hoppe didn't figure in was the IRS. Agents first contacted him in April of this year, demanding to know why he claimed the full deductions when he'd rented to relatives. The latest call from the IRS was in October, indicating that a bill for back taxes and penalties --potentially in the thousands of dollars--would be in the mail shortly. Hoppe says the IRS agent explained that he was "simply doing his job," and knew nothing of policy changes under way in Washington.
"What a mess," says Hoppe. "I try to do what's right for my family--not for any particular financial gain for myself personally--and I'm suddently up against the IRS, and probably even heading for court. It's depressing."
Hoppe told Sen. Armstrong that he's writing to his representatives in Congress to push the corrective family-rental tax legislation through this year. For other real estate owners interested in doing the same, write to the House Ways and Means Committee, Subcommittee on Select Revenue Measures, 1101 Longworth Building, Washington 20510. Refer to "family-rental tax amendments, section 280A."