Congress gave millions of American real estate owners four big holiday gifts before leaving town for the year.
It repealed the controversial "family rental tax" and liberalized tax deductions for offices in the home. It also simplified tax treatment of "co-purchasing" -- a technique increasingly used for home-buying -- and made life easier for owners of vacation homes.
The four real estate measures, grafted onto an 11th-hour tax bill prior to adjournment, had been the subject of hot political battles with the Internal Revenue Service for nearly 18 months.
The family rental-tax issue in particular had stirred up severe public criticism of the federal tax code and the IRS. Thousands of homeowners sent telegrams and letters of complaint to Capitol Hill and the Treasury, many of them documenting cases of personal hardship caused by the IRS's tough policies on rental of property to relatives.
Under the U.S. tax code, anyone who rented any type of real estate to a relative -- no matter what amount of rental was charged -- had been treated by IRS in recent years as having made "personal use" of the property.
This disqualified the owner from taking the normal, full range of federal tax deductions open to all other owners of rental real estate. Tax losses for depreciation, repairs, maintenance and other legitimate costs were ruled out.
The net effect of the law was to raise federal taxes on people who leased a house or apartment to a relative, even if they were charging rents equal to or in excess of what they'd charge total strangers.
Homeowners who had no knowledge of the law or IRS's position found themselves in trouble with the federal government. For example, Charles Hoppe of San Jose, Calif., and William Spence of Denver were pressed by IRS auditors for thousands of dollars in back taxes because they had rented to elderly parents (in Hoppe's case) or to a son (in Spence's case). IRS agents conceded to both of them that they'd have no audit problems at all if they had rented their property to non-relatives.
The 1981 family rental-tax amendment will end such problems. The revised law will treat rentals to relatives at "fair market" rates as the equivalent of rentals at fair market rates to non-relatives. As long as the rent levels are "comparable" to those charged on similar accommodations in the local market, and no "substantial gifts" have passed hands between the owner and renter, the property will qualify for all regular deductions.
The revised law also will be retroactive to December, 1975, thereby extending relief to taxpayers (like Hoppe and Spence) currently fighting IRS audits.
Here are quick summaries of the other three changes made in the tax law.
Office in the home. Taxpayers who set aside a part of their residence to conduct a part-time business that produces a secondary income will be able to make deductions on the legitimate business expenses associated with that space.
The expenses can include utilities, depreciation, maintenance and repairs that are directly attributable to the business-related space in the home.
The space will have to be used "exclusively" for business purposes and also will have to be the "principal" place from which the secondary business is conducted.
Until now, the IRS had insisted that only homeowners whose principal place of business was in their residence -- as opposed to an office downtown -- could qualify for deductions.
Co-purchasing. The revised law clarifies tax treatment for certain consumers who "co-purchase" homes using equity-sharing arrangements. In cases where two people buy a house or condominium, one of whom occupies the unit and pays rent to the other, the law will now allow investor deductions to the non-occupant co-owner. Under prior law, the co-owner would have been effectively denied the ability to write off losses from his or her investment.
Vacation homes. If you own a rental vacation property, and periodically visit it to fix it up, the IRS will no longer be breathing down your neck when you bring a friend or two. Under the revised tax law, IRS won't be able to claim that you're making personal, (that is, non-business) use of your beach house or ski condominium on a "maintenance visit" as long as you spend most of the time repairing or maintaining your unit. The fact that you have company along -- and they're not painting the walls or fixing the roof all day -- won't matter at tax time any more.
Kenneth R. Harney is executive editor of Housing & Development Reporter, published here by BNA, Inc.