The Eighth Circuit Court of Appeals affirmed the Tax Court’s decision that a couple did not show they held the farmhouse as a rental or for the production of income (sale at a gain later). They did rent out the farm land. But the Courts distinguished the land rental from the farmhouse.
Mr. and Mrs. Meinhardt bought 140 acres of farmland in rural Minnesota that had an 80 year old farmhouse that was in need of substantial repairs. The cost was $75,000.
They regularly rented the farm land for cash rent. But they did not prove the farmhouse was held to profit from its rental or its appreciation.
Since 1976 they made improvements to the farmhouse and “tried to rent it”. They put ads in the newspapers, put notices up in the local stores and told various people the house was for rent. However, they never did find a renter that would pay cash. They did have a local couple that lived in the farmhouse, performing services such as carpentry in lieu of cash rent, but did not report any income. At times their relatives occupied the house while doing repairs and maintenance on the house.
The entire farm was worth $375,000 at the time of trial. Mr. Meinhardt testified it would be possible to sell the farm house separately by parceling off about ten acres with the house.
This is just another case where the evidence was found to not support their tax reporting of the house as a rental.
They did not report rental income equal to the value of the services by relatives and others. They did not show the value of those services was even close to the fair rental value of the property. They made no changes in their efforts to rent the property in the 30 years they owned it. They did not show a rental property business strategy (no written business plan). By letting relatives to live in the house rent free, it indicated they held it as an alternative residence for the personal use of their extended family.
The court found they failed to prove they were holding and improving the property to profit from its rental or its appreciation (as opposed to improving the house for personal use). Their tax returns were adjusted by IRS to deny the rental expenses.
The lesson is to prove every part of your argument. A written business plan coupled with changes in the efforts to rent the house would have been very helpful.
If you have rental property, it makes good sense to do all you can to get it rented for the fair rental value. Property managers could have been helpful in getting renters.
Did you hear “Don’t hold on to past regrets or mistakes. Accept, adjust and keep moving forward”.