Monday, July 5, 2004

As noted earlier on TaxProf Blog, ABC’s tax lawyers have taken an aggressive position in telling recipients of home makeovers that they can avoid tax on the value of the improvements by characterizing the items as short term rental payments within the meaning of Code section 280A(g). The local paper has a front page story (complete with some great pictures) on the tax treatment of a San Diego family who had their 1200 square foot home expanded by ABC into a 4600 square foot behemoth:

[T]he families in the program are “renting” their houses to the production company during the frenetic renovation. A long-standing tax provision allows homes to be rented for less than 15 days a year with no tax consequences, and with improvements voluntarily made during that period by the tenant considered to have no value to the owner.

La Jolla tax attorney Cris John Wenthur called that reasoning “incredible” and predicted “Extreme Makeover” families may face skeptical IRS agents or have to battle out their cases in tax court. “It falls within the letter of the law,” he said. “Does it fall within the spirit of the law or is it a sham?” If the 15-day rent and improvement rule doesn’t stand, he estimated [the homeowner’s] 2004 state and federal tax bill would be an additional $200,000 or more, if the value of new construction, the building permit fees, new furnishings and landscaping were all considered taxable….

A spokesman for the IRS said no ruling has been issued on tax implications facing “Extreme Makeover” households and advised participants to seek advice from tax attorneys and CPAs. Now that would be a great spinoff: “Extreme Makeover: Taxpayer Edition.”

For prior TaxProf Blog coverage of this issue, see here, here, and here.