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An Interesting Tax Gimmick

Contributed by mm | November 18, 2003 9:02 PM PST

MSN Money has a new story "6 ways you can cut your 2003 tax bill now". The first five methods are no news to me but the last bullet looks very interesting. It works like this way:

- You rent your home to a charity you prefer and it pays you $500
- You contribute $600 to the charity

The tax consequences are:

For you:

- You may get up to 15 days of rent free from income tax every year. (Internal Revenue Code Section 280A(g)), so you get $500 for free.
- For your charity donation of $600, you get $150 worth of reduced income tax (if you are in the 25% tax bracket)
- You pay $600 to charity.
- Your net benefit is $500 + $150 - $600 = $50

For your charity:

- It pays $500 in rent
- It receives $600 in donation
- The net benefit is $600 - $500 = $100

Does it seem too good to be true? Actually you still paid somehow in this process. You forfeited the opportunity cost of renting your property to someone else for real income. On the other hand, the article does not mention if there are some IRS rules that prevent you from renting at beyond-normal rates, so if your house's market rent is $100 and you rent to the charity for $500, you can still get a good deal out of the process. The only restriction I know of is that donations other than cash and stock above $5,000 requires an appraisal, but in this case, you are donating real cash.

Is it a loophole?

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