topic Personal vs rental use days when tenant moves out early in Investors & landlords

Personal vs rental use days when tenant moves out early

Anonymous — Tue, 01 Feb 2022 01:30:16 GMT

Pub 527 states: "Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day."

Fact pattern (hypothetical)

2-year lease Jan 1 2021 - Dec 31 2022 at a fair rental price
Tenant pays rent at the start of each quarter: Jan 1, Apr 1, Jul 1, Oct 1
Tenant vacates on Aug 1 2021
Tenant agrees to forfeit the advance rent paid for Aug and Sept and to pay an additional 1 month of rent (Oct) to be released from the rest of the lease.
Owner occupies the property in mid-August through the end of the year and leases it to a new tenant at a fair price effective 1/1/22.

Since personal use exceeds 14 days, the property was "used as a home". HOWEVER, the tenant paid rent for August and September, so these are not personal use days by the definition established in Pub 527. As the tenant paid a 1-month break fee, is October also considered rental days not personal use days?

Thanks!

Re: Personal vs rental use days when tenant moves out early

M-MTax — Tue, 01 Feb 2022 01:44:11 GMT

Well read the regulation:

https://www.bradfordtaxinstitute.com/Endnotes/Prop_Reg_1_280A-1e6.pdf

Pub 527 also has an example:

Example.

Your beach cottage was available for rent from June 1 through August 31 (92 days). Except for the first week in August (7 days), when you were unable to find a renter, you rented the cottage at a fair rental price during that time. The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Your family also used the cottage during the last 2 weeks of May (14 days). The cottage wasn’t used at all before May 17 or after August 31.

You figure the part of the cottage expenses to treat as rental expenses as follows.

The cottage was used for rental a total of 85 days (92 − 7). The days it was available for rent but not rented (7 days) aren’t days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend.
You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
Your rental expenses are 85/99 (86%) of the cottage expenses.

Note.

When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. If you have a net loss, you may not be able to deduct all of the rental expenses.

Re: Personal vs rental use days when tenant moves out early

AmyC — Tue, 01 Feb 2022 02:07:51 GMT

Yes. Topic No. 414 Rental Income and Expenses - IRS says:

Amounts paid to cancel a lease – If a tenant pays you to cancel a lease, this money is also rental income and is reported in the year you receive it.

Excellent distinction between gross and rental income, great question.

Re: Personal vs rental use days when tenant moves out early

PedroXiminez1 — Tue, 01 Feb 2022 03:54:19 GMT

OP here. Intuit locked me out of my original account.

Thanks for the above responses. I've read Pub 527 many times and it doesn't answer the question. There is no doubt that amounts paid to cancel a lease are rental income in the year they are received.

To clarify: The question is around whether days spent at the property during the time the tenants (a) were paying rent but not occupying, and (b) had paid rent in order to get released from the rest of the lease, are considered personal days or rental days for purposes of allocating expenses between personal use and rental use when the rental property is considered a "home." Noting again the line in pub 527: "Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day."

Thanks again

Re: Personal vs rental use days when tenant moves out early

AmyC — Tue, 01 Feb 2022 04:51:36 GMT

Yes, all paid for days are leased days - not personal use.