Merely charging your daughter a monthly rent that is at or above fair rental isn’t enough if you actually don’t do much to attempt to collect the rent. This lesson was learned by the taxpayer in Savello v. Commissioner, TC Memo 2015-24.

IRC §280A limits deductions that a taxpayer may claim with respect to a dwelling unit a taxpayer uses as a residence, Under IRC §280A(d)(1) a taxpayer is deemed to use the dwelling unit if the taxpayer uses that residence for personal purposes for the greater or 14 days or 10% of the days during the year that the dwelling unit is rented at fair value. Such personal use, per IRC §280A(d)(2)(A) includes use by qualifying relatives unless the relative uses the property as his/her personal residence and pays fair rental value for the property. The limitations on deductions triggered by such excessive personal use are referred to as the “vacation home” limitations.

In this case Cheryl Savello owned a property in Nevada that was the item in question. That property had one master bedroom and two smaller bedrooms. In 2010 she rented out the master bedroom to one of her daughters, one of the smaller bedrooms to another daughter and the other bedroom to an unrelated individual. In 2011 she rented out the master bedroom to a daughter.

She owned another property in Nevada and leased an apartment there as well. Her rental property, the other Nevada property and the apartment are within one quarter mile of each other. She kept a bed at the Nevada rental property for her personal use. She testified that she did not stay overnight in that property during 2010, but she did come and go more frequently during 2011. She claimed she started living in that property at the end of 2011 by herself and she planned to sell the property. However, the Court noted that it did not find her testimony on her residence to be credible.

However that won’t be relevant if, in fact, the daughter’s use is such that it would count as personal use, since regardless of Cheryl’s residence the daughter’s use would make the properties personal use properties.

The Court analyzed the amounts that Cheryl claimed to have been charging her daughters for rent. While the Court found inconsistencies in her testimony, it did find that the claimed amounts appeared to be at least fair value.

However, the Court noted that Cheryl provided no evidence of how much rent the daughters had actually paid her during the years in question. The Court noted:

Petitioner testified that she was lenient with her daughters if they were unable to make their rent payments each month. She testified that her daughters “tried their best to pay me every month” but described their efforts to pay as “an occasional trickle of money”. One of petitioner's daughters testified that she was “very spotty with rent in 2010”. It is unclear for how many months the daughter paid rent for 2010 and 2011. Petitioner testified that she did not know how much rent that daughter had paid during 2010 and 2011.

Based on the Court’s doubts about how much use Cheryl herself had made of the property for the years in question and the daughters failure to actually pay the rent, regardless of whether that rent was a “market rent”, that Cheryl’s personal use for each year exceeded the trigger levels under §280A.

Thus, Cheryl’s rental losses were limited by the vacation home rules.