The Eighth Circuit Court of Appeals has affirmed a Tax Court decision disallowing deductions related to a farmhouse.

Donald Meinhardt and his wife purchased 140 acres of farmland in rural Minnesota and an 80-year-old farmhouse in need of repair. In the years following, the Meinhardts at times farmed the tillable land but regularly rented the farmland to neighboring farmers for cash rent. On their 2005, 2006 and 2007 returns the Meinhardts deducted as ordinary and necessary business expenses, substantial expenses related solely to the farmhouse and surrounding outbuildings, in addition to their expenses related to the leased farmland.

The IRS issued notices of deficiency that explained, “Since the farm land is the only part of the property that is leased and income derived, you cannot deduct the expenses of owning the home on the farm.”

The Meinhardts petitioned the Tax Court, which denied the petition because the Meinhardts failed to prove that the farmhouse expenses “were tied to a real estate property rental business for purposes of Code section 162, or related to “property held for the production of income” within the meaning of Code section 212.

The Eighth Circuit affirmed the Tax Court ruling, noting that they failed to prove that they were holding improving the property its rental or its appreciation as opposed to improving it for personal use. “The reasonableness of this alternative personal use for the expenditures in 2005-2007 was rather dramatically confirmed when they sold their home in suburban Minneapolis and moved into the farmhouse in 2010,” the court stated.

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