J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

9.10 Rentals Lacking Profit Motive

If you rent a residential unit for 15 days or more and a loss is not barred under the personal-use limitation (9.7), the IRS may attempt to disallow a loss by claiming that you had no profit motive in placing the unit up for rent. If the IRS makes such an argument, you must try to prove a profit motive (40.10). Any loss disallowed on these grounds may not be carried over to a later year.

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Planning Reminder

Profit Motive

A profit motive is presumed if you can show a profit for at least three of the last five years you engaged in rental activities. The IRS, however, may rebut this presumption, but there are ways to fight this rebuttal (40.10).

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EXAMPLES

1. (Loss allowed.) In 1973, Clancy purchased a house and land in a coastal resort area of California. Prior to the purchase, Clancy was told by a renting agent that he could expect reasonable income and considerable appreciation from the property. Previously, he had sold similar property in the same development at a profit. After the purchase, Clancy spent $5,000 to prepare the house for rental, and gave a rental agency the exclusive right to offer the property for rent. The house was available for rent 95% of the time in 1973, and 100% of the time in 1974. However, rentals proved disappointing, totaling only $280 in 1973 and $1,244 in 1974, despite ...