Evaluating Razavi-Type Fixed Rental Pool Arrangements: How Important Are Tax Consequences in Making the Investment Decision?

Tax consequences have typically been a key factor in the decision to invest in a second or vacation home. Tax benefits can significantly enhance the cash flow from such a property and thus make the property more affordable. However, there is a potential for abuse when such a residence is used a significant portion of the time for personal reasons, and for that reason Congress enacted the Section 280A rules in 1976. The Razavi decision provides taxpayers who participate in pooling arrangements with their vacation properties a possible way to avoid the Section 28OA limitations on losses from such properties. However, the taxpayer should ensure that the fixed payment is somewhat representative of what the taxpayer would otherwise net if he or she was renting the one unit, considering average rentals and occupancy rates. When properly structured, the tax benefits generated with a fixed Razavi-type agreement may increase the attractiveness of such a fixed rental option. A simple spreadsheet may be used to analyze the potential tax and cash flow savings under fixed and variable options, and to analyze the cash flow affects of changes in key variables. In general, this analysis indicates that the tax benefits of a Razavi-type fixed rents election increase as the projected net loss increases or as the number of actual rental days increases.