Home Office, Vacation Home, and Home Rental Deductions (Portfolio 547)
This Portfolio describes §280A, which limits deductions attributable to the business and rental use of a dwelling unit if the property is also used by a taxpayer as a residence.
Tax Portfolio, Home Office, Vacation Home, and Home Rental Deductions, No. 547, describes the operation of §280A, which limits deductions attributable to the business and rental use of a dwelling unit if the property is also used by a taxpayer as a residence during the tax year. Section 280A is intended to prevent taxpayers from converting nondeductible personal expenses into deductible business expenses.
The Portfolio analyzes the scope and application of §280A, which applies generally to deductions allowable with respect to a dwelling unit personally used by a taxpayer as a residence. A dwelling unit may be a house, apartment, condominium, mobile home, boat, or similar property with basic living accommodations. Section 280A also applies to other property, such as a garage, which is closely related to the dwelling unit. Section 280A prescribes criteria for determining whether a taxpayer’s use of a unit during the tax year is sufficient to trigger the section.
When it applies, §280A generally disallows home business and rental deductions. However, §280A carves out six statutory exceptions to the general disallowance rule. In particular, deductions are not prohibited by §280A for a portion of a dwelling unit used regularly and exclusively: (1) as the taxpayer’s principal place of business for any business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, “in connection with” the taxpayer’s business. Deductions also are not prohibited by §280A for the regular (although not necessarily exclusive) use of a residence for certain storage uses, and for providing day care services. Finally, deductions attributable to the rental use of a residence are not prohibited by §280A.
The standard for determining a “principal place of business” historically caused a significant amount of controversy among taxpayers, the IRS, and courts. This critical standard, one of the lynchpins of §280A, is analyzed in detail in this Portfolio. In Comr. v. Soliman, (1993), the Supreme Court enunciated two primary considerations for determining whether a home office constitutes a taxpayer’s principal place of business: (1) the relative importance of the activities performed at each business location, and (2) the relative amount of time spent at each location. A “principal place of business” also includes a place used by a taxpayer to conduct substantial administrative or management activities, if the business has no other fixed location where the taxpayer carries out administrative or management functions.
A taxpayer must allocate home expenses to the portion of the home used for the business activity. A taxpayer who rents a dwelling unit or provides day care services also must allocate expenses based on the amount of time the dwelling unit is used for the activity. A taxpayer may deduct expenses allowable under §280A and allocated to the business or rental use of a home only to the extent of gross income from the business or rental activity. The gross income limitation prevents home business and rental expenses from creating or increasing a net loss from the activity. Section 280A imposes a “tier system” for deducting expenses in cases in which the potential deductions exceed the deductions allowable under the gross income limitation.
Section 280A stakes out the primary ground for determining whether a taxpayer may deduct expenses attributable to a home, including costs for a home office, a vacation home, or a rental home. The rules imposed by the statute are intended to prohibit taxpayers from converting personal expenses into deductible business expenses. Given the often fuzzy line between a valid home business expense and a nondeductible personal expense, it seems likely that the IRS and courts will continue to struggle with issuing rules and decisions that attempt to draw an appropriate line between deductible and nondeductible expenses, and that taxpayers will continue to challenge the rules for allowing deductions in this area.
Table of Contents
II. Section 280A(a) Disallowance of Deductions Attributable to Business Uses of a Home
III. Exceptions to §280A Disallowance Rule
IV. Additional Requirements for Expenses Allowable Under §280A
V. Disposition of Property for which Expenses under §280A Have Been Deducted
VI. Interaction of §280A with Other Code Provisions