Category: Individuals; Real Estate
Subject: Temporary Rental of Residence
Title: Passive Activity Loss Provisions vs. Rental Use of Residence Rules
IRC Sections: 469, 280A
Filename: 1345.html
Date Produced: 10/94

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In 1990, Taxpayer (TP) temporarily rented out his New Jersey residence in connection with his move to Arizona. The New Jersey residence was sold in May of 1991. Although the sale in 1991 produced a loss and Section 1034 is inapplicable, it is assumed that the residence retained its character as TP's principal residence for purposes of Section 1034 until its sale in May, 1991.

Issue
The tax issue is whether loss from the temporary rental is a passive activity loss under the provisions of Section 469 or, in the alternative, is the loss subject to the rental use of residence rules of Section 280A.

Answer
It is clear that the temporary rental activity is subject to the passive activity rules of Section 469.

Discussion
Rental activities are treated as per se passive under the passive activity rules. Section 469(c)(2). Section 280A also appears to simultaneously apply to any situation in which a residence is used for personal purposes for more than the greater of 14 days or 10% of the number of days the residence is rented at fair rental value. As you know, if Section 280A applies, then expenses attributable to the rental activity are limited to the gross income derived from the rental. Superficially at least, there appears to be a potential conflict between these two provisions. Section 469(j)(10) speaks in part to the conflict by providing that to the extent a rental activity is subject to the limitations of Section 280A, the activity will not also be subject to the passive activity rules. Hence, if the Section 280A limitations come into play, Section 280A rather than Section 469 will control.

Although not explicitly articulated by either section, it seems clear that if the limitations of Section 280A are not applicable to a rental activity, then the rules of Section 469 apply. As mentioned above, rental activities are per se passive and are thus subject the passive activity rules of Section 469 absent some special rule to the contrary. In addition, if rental activities not subject to the Section 280A limitations were not automatically considered subject to the passive activity rules of Section 469, the coordinating provision, Section 469(j)(10) would be meaningless in the first instance. The mere existence of Section 469(j)(10) proves that Section 469 must apply if Section 280A does not.

Section 280A provides a special rule specifically for the temporary rental of a personal residence. In effect, personal use in the period preceding temporary rental is not counted as personal use for purposes of the Section 280A limitations. Section 280A(d)(4). In other words, for 1990, TP's personal use of the residence prior to the period of temporary rental will not count as personal use days for purposes of determining whether the limitations of Section 280A apply. In effect, Section 280A views TP's residence as having been rented for the entirety of 1990 with the result that the limits under Section 280A are not applicable for 1990.

Since rental activities are per se passive under Section 469(c)(2), and the coordination provision of Section 469(j)(10) does not exclude rental activities to which the limitations of Section 280A do not apply, it seems to me clear that the temporary rental of TP's residence in 1990 and 1991 is subject to the passive activity rules of Section 469.