Rev. Rul. 80-55

1980-1 C.B. 65, 1980-9 I.R.B. 7.

                       Internal Revenue Service
                                 Revenue Ruling

                        RENTAL EXPENSES; HOUSE SWAPPING

                            Published: March 3, 1980

Section 280A.--Disallowance of Certain Expenses in Connection with Business Use of Home, Rental of Vacation Homes, Etc.

(Also Section 162; 26 CFR 1.162-1.)

  Rental expenses; house swapping. Two homeowners agreed to rent their houses to each other for fair rental value for use as personal residences. In addition to those items deductible without regard to rental of the dwellings, such as interest and taxes, the homeowners are entitled to deduct operating expenses and depreciation, in that order, but only to the extent gross rental income exceeds those deductions allowable without regard to the rental.

ISSUE

  Are the expenses attributable to the rental of houses deductible under the following circumstances?

FACTS

  Taxpayers A and B each own a house. Under a rental agreement, A's house is rented to B for a fair rental value of 6x dollars per year, and B's house is rented to A for a fair rental value of 6x dollars per year.  A and B use the rented houses as their personal residences.  At no time during the taxable year of A and B do they reside in their own houses.

  For the taxable year, A and B each received rental income of 6x dollars and paid real estate taxes of 2x dollars and interest on the mortgage of 2x dollars.  A and B each reported the 6x dollars as rental income and took deductions of 2x dollars for taxes, 2x dollars for interest, 6x dollars for depreciation, and 1x dollars for expenses attributable to the rental of the house.

LAW AND ANALYSIS

  Section 280A(a) of the Internal Revenue Code of 1954 provides that no deductions are allowed with respect to a dwelling unit that is used by the taxpayer as a residence, unless specifically provided and otherwise allowable. Section 280A(b) provides that subsection (a) does not apply to deductions such as taxes and interest that are otherwise allowable without regard to a connection with a taxpayer's trade or business.

  Section 280A(d) of the Code provides that a taxpayer uses a dwelling unit during the taxable year as a residence if the taxpayer uses the unit for personal purposes for a number of days which exceeds the greater of 14 days or ten percent of the number of days during the year for which the unit is rented at fair rental.  The unit is used for personal purposes for any day it is used by an individual who uses the unit under an arrangement that enables the taxpayer to use some other dwelling unit, whether or not a rental is charged for the use of the other unit.

  If the dwelling unit is used as a residence, section 280A(c)(5) of the Code limits the deductions attributable to the rental activity to the amount by which the gross income derived from the rental activity exceeds the deductions otherwise allowable with respect to the rental activity such as interest and taxes.

  Section 280A(e) of the Code provides that if there is personal use of a dwelling unit during the taxable year the amount

deductible with respect to the expenses allocable to the rental of the dwelling unit is limited to an amount that bears the same ratio to the expenses as the number of days the unit is actually rented out for the year at a fair rental bears to the number of days the unit is actually used for all purposes during the year.  This limitation, however, does not apply to the excess amounts of interest or taxes that are allowable even if not attributable to rental activity.

  Because A and B are renting each other's house under an arrangement within the meaning of section 280A(d) of the Code, A is using the house owned by A for personal purposes and B is using the house owned by B for personal purposes.  Therefore, any deductible expenses allocable to the rental are subject to the limitations of section 280A(e). In determining the relationship of rental days to total days of use for purposes of making this allocation, the number of rental days includes each day the house was rented for a fair rental value during the taxable year even though the taxpayer is considered to have personally used the house for that day under section 280A(d).

HOLDING

  A and B are entitled to deduct the properly allocated expenses attributable to the rental of the houses, limited to the amount by

which the gross income from the rental exceeds the deductions otherwise allowable such as interest and taxes.  A and B must deduct these expenses in the following sequence: items that are deductible without regard to a connection to a business activity, such as interest and taxes; operating expenses; items that affect basis, such as depreciation.  Because the rental income is 6x dollars, A and B are entitled to the following deductions:  2x dollars for taxes, 2x dollars for interest, 1x dollars for expenses, and 1x dollars for depreciation.  The other 5x dollars of depreciation expenses are not deductible since they exceed the 6x dollars of rental income.

Rev. Rul. 80-55, 1980-1 C.B. 65, 1980-9 I.R.B. 7.