Owning and Living on Resort Property

[JackieCPA]

Hello everyone!

I have a client who has purchased a resort - this resort has about 10 cabins on the property.

The owner and his family lives in one of the cabins (100% of the year) - (sole proprietorship) 

As far as depreciating the cabins - I'm assuming he can only depreciate the 9 cabins that he doesn't live it. However, the utilities is under one giant bill. Is that something that I can back-out a percentage that we figure is for his personal cabin? I'm not finding anything online that is really helping me with an owner living on the property of the resort. 

Any help or advice would be much appreciated!

Thanks!

[Lee B]

You just have to use a common sense approach as far as allocating expenses.

One thing I would do is set up each cabin as a separate asset on the depreciation schedule.

A basic asset cost segregation study would also be very helpful i.e. furniture & appliances, landscaping, other land improvements.

If there are any facilities shared by both the owner and visitors, things would get complicated.

[Terry D EA]

I agree with cbslee to use a common sense approach. it is difficult to tell who uses the most electricity; etc. Personally, I would average the cost between the cabins and subtract out 1/10 of the expenses. Absolutely keep a separate spreadsheet for depreciation of each cabin and it's contents. This will enable you to properly capitalize any improvement costs. With that said, was the purchase all inclusive or were each cabin have it's own acquisition cost? Again, if all were the same or relatively similar size, cost averaging and subtracting out the 1/10 might be the way to go. 

[Lee B]

 I think I would approach it similar to the allocations used for a Schedule C Daycare client for any shared expenses.

Keep track of the number of days each unit is occupied pus 365 days for the owner occupied unit,

[micpa]

You have a great tax planning opportunity here if the owners manage the resort.  You could move the business to a separate entity, execute an agreement requiring the managers to reside at the location for the convenience of the business.  Their unit may be depreciable and they may also be able to write off other expenses such as food.  I would study up on this one to see what is available to them.  

[Lee B]

9 minutes ago, micpa said:

You have a great tax planning opportunity here if the owners manage the resort.  You could move the business to a separate entity, execute an agreement requiring the managers to reside at the location for the convenience of the business.  Their unit may be depreciable and they may also be able to write off other expenses such as food.  I would study up on this one to see what is available to them.  

Your idea might work if the managers were nonowners but otherwise no.

[DANRVAN]

11 hours ago, micpa said:

11 hours ago, micpa said:

You could move the business to a separate entity, execute an agreement requiring the managers to reside at the location for the convenience of the business.  Their unit may be depreciable and they may also be able to write off other expenses such as food.  I would study up on this one to see what is available to them.  

 

I have researched this before.

It would depend on facts and circumstances.   There has been favorable case law for shareholder-employee farmers and ranchers, Johnson and Grant to name a few.  In those cases, residing on the premises was key to the operation, therefore the housing was deductible by the corp. and excluded by the shareholders.  In other  cases the exclusion was denied, usually because there was not a strong business connection or agreement.

In regards to partnerships, courts have been less favorable to partners with larger interest and more favorable to partners with minor interest, as in the case of Armstrong.  (That came from recent research for a farm partnership; son holds a minor interest and housing is provided.)

11 hours ago, micpa said:

You could move the business to a separate entity

In may cases, the property was transferred to the corporation.  However, reg 1-119-1(c)(1) specifically says that leased property is considered part of the business premises and used the example of cowhands herding cattle on leased range for their employer.  So it appears that property leased form shareholder to corp would meet the "business premise" requirement of sect 119 while keeping real estate out of the corp.

[Lee B]

Just wondering, were these court cases District Court, Circuit Court or Supreme Court cases?

Sometimes the IRS accepts court cases results and other times they don't,since they only have to accept Supreme Court case results

If the IRS doesn't accept the court cases, then your client could end up incurring significant representation fees if they ended up in audit.

[DANRVAN]

9 minutes ago, cbslee said:

If the IRS doesn't accept the court cases

None of my clients have taken the housing exclusion as shareholders or partners.   I did the research, explained the process and let them make the decision.

[DANRVAN]

2 minutes ago, DANRVAN said:

None of my clients have taken the housing exclusion as shareholders

They usually hear from a another farmer or rancher who says "my accountant told me I can deduct my personal housing and groceries by forming a corporation".

[Lee B]

Earlier this year I picked up a new write up client, an S Corporation. The previous tax preparer had them put their house in the corporation.

They have a 12 acre hobby farm and their S Corp operating business has no relationship to the farm and only requires a very small office,

since 95 % of their services are performed at their customers premises. 

[DANRVAN]

10 hours ago, cbslee said:

They have a 12 acre hobby farm and their S Corp operating business has no relationship to the farm

Hopefully they signed up for the $10 Audit Protection Plan