Client owns a vacation home in NC which they use for less than 14 days or 10%. Last year's accountant used the "Tax court method" so that more of the interest and real estate taxes would be available for schedule A.

Where would I find information on exactly how this works?

Thank you.

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See QF 8-2 under Rental Expense Allocation, Also J.K.Lasser's has a page on the subject.

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I usually end up just googling "Bolton" - that's the name of the case where the court told the IRS that their way [of allocating vacation home interest] wasn't the only way. It must be more than twenty years old by now; is it still good law?

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>>is it still good law?<<

It is still in effect, but the IRS does not agree with it. That's one of the quirks of our tax system, that the IRS is not bound by court decisions. Well, at least not on the administrative level. The taxpayers may eventually win on the issue, but the IRS can force them to sue the government in order to utilize the precedent.

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Omigosh! Could this be one of those disclosure-required-to-avoid-penalties "We're-not-following-the-regulations-because-they're-stupid" items? Form 8275, maybe?

Or is this a classic "the court's opinion may be enough weight to fight off the penalty but not enough weight to win the audit" issues?

Omigosh! I may have exposed some clients to penalties without bowing three times to the East. Oy.

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The IRS prorates expenses using the ratio of rental-use days to the total of rental-use and personal-use days. This method applies to all rental expenses.

The U.S. Tax Court and the U.S. 9th and 10th Circuit Courts of Appeals have held that the correct ratio to use for mortgage interest, real estate taxes, and casualty losses is the days of rental-use to the total number of days owned during the year. So the IRS could appeal

One could always appeal the auditors decision to the U.S. Tax Court for clarification.

There are also other aspects of the Vacation Rental that includes carryover of unhallowed expenses of one year to a future under certain conditions.

Since this is not the principal residence, the PGA rule for rental of less than 15 days of the principal residence does not apply. But if the client is married, it could be possible to have each spouse have a different principal residence and different tax home state, which would change the whole issue not only for the vacation rental but state level income tax liabilty too.

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