Taxes and Business Decisions 337his family. No expenses are deductible for such a facility except taxes and mort-
gage interest. A rental use property is used by the taxpayer and his family for
less than 15 days (or 10% of the number of rental days) and other wise offered
for rental. All the expenses of such an activity are deductible, subject to the
passive loss limitations. A mixed use facility is one that falls within neither of
the other two categories.
If Morris were to engage in a serious rental effort of his property, his oc-
casional weekend use combined with his two-week stay around the golf tourna-
ment would surely result in his home falling into the mixed use category. This
would negatively impact him in two ways. The expenses that are deductible
only for a rental facility (such as maintenance and depreciation) would be de-
ductible only on a pro rata basis for the total number of rental days. Worse
yet, the expenses of the rental business would be deductible only to the extent
of the income, not beyond. Expenses which would be deductible any way (taxes
and mortgage interest) are counted first in this calculation, and only then are
the remaining expenses allowed. The result of all this is that it would be im-
possible for Morris to generate a deductible loss, even were it possible to use
such a loss in the face of the passive loss limitations.
Naturally, therefore, Morris had long since decided not to bother with at-
tempting to rent his country getaway when he was unable to use it. However,
the scheduling of the closing this year presents a unique tax opportunity of
which he may be unaware. In a rare stroke of fairness, the Code, though deny-
ing any deduction of not other wise deductible expenses in connection with a
home rented for 14 days or less, reciprocates by allowing taxpayers to exclude
any rental income should they take advantage of the 14-day rental window.
Normally, such an opportunity is of limited utility, but with the tournament
coming to town and the hotels full Morris is in a position to make a killing by
renting his home to a golfer or spectator during this time at inf lated rental
rates. All that rental income would be entirely tax-free. Just be sure the tenants
don’t stay beyond two weeks.
LIKE-KIND EXCHANGES
Having acquired the desired new business and secured the services of the in-
dividual he needed to run it, Morris turned his attention to consolidating his
two operations so that they might function more efficiently. After some time,
he realized that the factory building acquired with the plastics business was
not contributing to increased efficiency because of its age and, more impor-
tant, because of its distance from Morris’s home office. Morris located a more
modern facility near his main location that could accommodate both opera-
tions and allow him to eliminate some amount of duplicative management.
Naturally, Morris put the molding facility on the market and planned to
purchase the new facility with the proceeds of the old one plus some additional
capital. Such a strategy will result in a tax on the sale of the older facility equal