This article is reproduced with permission from Spidell Publishing, Inc.
A recent case serves as a reminder of maintaining contemporaneous records of work being done on a rental property. The taxpayer kept records of all of his expenses but failed to document the work he claimed he did on the property and was therefore unable to show he was not using the property for personal purposes.
Activities were not for repairs
For 2010 and 2011, the taxpayer deducted business losses of $134,273 and $127,740, respectively, related to a rental property that was not rented and was also listed for sale during those years.
The taxpayer was an Alaskan attorney. He and his domestic partner were the sole members of an Indiana LLC that purchased the home of former NBA star Larry Bird. The taxpayer operated the property in Indiana as a bed and breakfast between mid-2008 and January 2010, after which the property was no longer rented because the bed and breakfast operation was not successful. During 2010 and 2011, the property was listed for sale, and the taxpayer traveled to and stayed at the property for a total of 26 days and 33 days, respectively. During these trips, the taxpayer spent several days at a time at a local casino/resort, accompanied by his domestic partner. During one trip, they travelled to Cincinnati for the taxpayer’s high school reunion; during another trip, they travelled to Louisville for several days.
The taxpayer claimed that he was at the property for business purposes to perform maintenance and repairs to the building and grounds. He kept records of airline tickets and car rentals, receipts for gas, meals and hardware store and grocery store purchases. However, he did not maintain a contemporaneous log of the work that he was allegedly performing on the property during these trips.
At trial, the taxpayer produced logbooks he created during audit that outlined the work he did on the property. Unfortunately, the taxpayer was unable to show that the days he spent at the property were not personal days of use. Without proof of the work he alleged, the deductions were denied because:
- there were full-time caretakers living at the property, whose duties included maintaining the property;
- a landscaping service was employed to care for the grounds May through December of 2010 and 2011; and
- the taxpayer was unable to show evidence of disrepair to the property that warranted the length of time he spent there.
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