Tax question: seller temporary leaseback a placement in service?

Question

Let’s say I buy a property that requires some repairs. The seller wants a temporary leaseback option where they stay in the property for a few months and pay rent (with a rental agreement, deposit, etc.). I let them do that, then after they move out do the repairs. Let’s assume the repairs qualify as deductible ones under de minimus and not improvements. Then I move into the property and make it a primary residence.   Can the seller leaseback be considered placement in service as a rental? The goal here, obviously, is the make the repairs deductible for tax purposes.

Eamonn McElroy · Answer

@Ashish Acharya

It seems OP's fact pattern is that he's acquiring a property which he intends to occupy as a personal residence.  Before he takes occupancy, he's going to let the prior owner live there "for a few months" for compensation.

Do we really have a property held for the production of income, let alone a trade or business based on the face value of what's been presented?

Eamonn McElroy · Answer

@Oleg Malkin

Yes, it could be that, but your OP heavily discounts the authenticity of that argument.  That's why it's advisable to clarify and dial in your original intent privately with your tax professional first, rather than document your original intent on a public forum.  ; )

Oleg Malkin · Answer

I mean the pattern could be: purchase, lease back, make repairs, attempt to rent out unsuccessfully, then occupy as a primary residence...

Property was held for the production of income for a few month, tenant moved out, you thought you could charge higher rent by making repairs and  then rents were not where you thought they would be and owner moved in.

Bob Langworthy · Answer

@Eamonn McElroy makes a good point. If the pattern is: purchase, lease back, make repairs, occupy as primary residence, I don't see how the repairs would count as a business expense. He's merely fixing up a house to move in to.

If, however, the pattern is: purchase, lease back, make repairs, rent it out, then occupy as a primary residence, I would be comfortable with looking at de minimis for the repairs.

Hope this helps,

Oleg Malkin · Answer

Even if everything happens in the same year and you end up with the same address on the return for the primary residence and the rental? I know nobody has a 100% answer but can that be a red flag?

Ashish Acharya · Answer

Yes,

1) buy a house

2) rent it out ( to Anyone)

3) repair after they move out as if you were turning the tenants. Deduct it.

4) convert to PR.

Tax question: seller temporary leaseback a placement in service?

Most Popular Reply