Client bought commercial building

[Terry53029]

Client MFJ, AGI around $100,000. Wife single LLC schedule C, eyelash/beauty salon. Bought commercial building with apartment jointly w/husband. 2400 sq. ft. total, 900 sq. ft. commercial. Plans on living in apartment, and making the 900 sq. ft. her salon. in past I would have her pay husband rent, and take 1/2 as expense. Husband would claim 1/2 as income on schedule E with all allowed expenses. That would save wife on SE taxes. Along comes 199-A, 20% off income. My plan no longer saves. Maybe home office ??  Would greatly appreciate any thoughts from you pros out there. Thanks

[TaxGuyBill · Accepted solution]

Unless I'm misunderstanding something, your prior method doesn't work, as you can't rent to yourself on the same tax return.  Or are they filing separate tax returns?

At any rate, it seems like the Schedule C depreciated 37.5% of the cost of the building directly on Schedule C (not a Home Office).

[Terry53029]

Thanks for the reply Bill. not renting to herself, renting from husband taking only half of rent as expense, as half belongs to her. It is being done since the 80s from a court case (don't remember the case) I've been doing it and none of my clients ever got a letter from IRS

[TaxGuyBill]

It would be interesting to see that court case, as that goes against everything that I have read about this situation.

While it may depend on how the title is held and/or if in a Community Property State, from what I understand Joint ownership usually means they both own 100% of the property, which would mean you are renting to yourself (which is not allowed).

But not getting a letter from the IRS does not mean it is acceptable.   

[abctax55]

:+1:

[dd4vols]

and to top it off,  the single-member LLC is a disregarded entity.

 You can't do this. I am in the midst of an IRS audit, and this came up one day when I was talking to the auditor. We weren't doing it on my client, but somehow we got on that subject, and he was adamant that it not allowable.

[abctax55]

I looked into this years ago (but not as far back as 1987 ) and you couldn't *move* the income between spouses particularly with self employment tax involved.  I'll see if I can find my research but it won't be by Monday.  

[qbteachmt]

You could never do this: "in past I would have her pay husband rent," when you Also told us this: "Bought commercial building with apartment jointly w/husband." for a Sched C business. Even filing separate returns, we've been told she is the Owner of the property.

[Terry53029]

here is a link (not official IRS, just an opinion)  of a full description of method: http://curcurucpa.com/blog/spouse-rental/

[TaxGuyBill]

But as I mentioned above, my understanding is that in most cases they both own 100% of the building.  *IF* that is correct, then it would not be allowed, right?

[abctax55]

Himself or herself is irrelevant on a joint return.

You converted SE income to rental income and that's is incorrect.

Amended returns need to be done.

[Terry53029]

Here is a more creditable site  for any one interested: https://www.bradfordtaxinstitute.com/Endnotes/TC_Memo_1993-326.pdf

[dd4vols]

A 1993 ruling, regarding the tax laws in place in 1987...…...I wonder if any tax laws have changed since 1987.  Not saying you are wrong.... I just know what an IRS agent told me less than a month ago.

[TaxGuyBill]

Interesting.  I was about to argue that is because that one was held in "tenants by the entireties" (which may be treated differently than regular joint ownership), but then that case cited Rev. Rul. 74-209, which seems like the IRS even says it is allowable.

Does anybody have Rev. Rul. 74-209 in full?

[sjrcpa]

Tenants by the entireties is for married couples only. If they own property this way it is one owner - the entirety. @TaxGuyBill  Bill-give me a week after April 15 and I can get that Rev Rul for you.