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Seasonal Transient Rental - No Personal Use

Level 2

I have a client who owns a "seasonal' transient rental (residence held in a Trust).  He rents for 3 months in summer and closes the house for the rest of the year.  There is no personal use so vacation home rules do not apply (and this year his average rental days were 7.8)  I've narrowed down our tax reporting choices to: 1) Make rental available all year - deduct all expenses and take depreciation for full year.  2) Only report activity related to the period available for rental (all income, expenses incurred during rental period and prorated expenses for property taxes, insurance...). 

For option 1 the rental needs to be advertised and available - this is questionable as he uses a local real estate agent who "advertises" via word of mouth and only makes it available for the summer months.  So would have a hard time proving it was advertised for a full year rental.  If we are stuck with option 2, can he take depreciation for the three months it is available for rent?  I believe he would be putting the residence "in and out of service" each year and it looks like deprecation may not be allowed (?) - though I've seen reference to "permanent" removal from service where this is only temporary removal.  It appears that the IRS does not provide much guidance in this area where there is no personal use for a seasonal rental.  Any suggestions would be greatly appreciated!

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2 Comments 2
Level 15

Why does he close it for the rest of the year?

My first guess is that it is closed because there is no demand for the rest of the year.  If that is the case, personally, I would treat it as all-year availability.

Level 2

Thank you for your reply.  It's complicated because the property is owned by a Trust. Trustee doesn't make any cash income from the rental b/c expenses exceed income (whole other story - emotional attachment to property).  He doesn't want to deal with renting in the winter.  If we treat as full year rental, we end up with cash losses on the rental and additional losses by taking full year depreciation.  There is investment income so that gets passed out to the beneficiaries and then depreciation will pass out to the beneficiaries according to TAI creating passive losses that they may never be able to take.  The Trustee is thinking about eventually selling the property within the Trust and investing the proceeds so the Trust will end up with a large gain and no passive losses to offset at the Trust level.  So taking depreciation is not advantageous in this situation.    My other option is to maintain a depreciation reserve and keep depreciation in the Trust (allowed per Trust doc) - but there isn't enough cash to cover the reserve.   I am trying to figure out what I can take for depreciation (if any) if he only reports the property available for three months - is it three months of depreciation or none since he puts it in and out of service in the same year?

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