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October 11, 2016

This could be the best tax loophole ever

If our California Film Commission (CFC) has it right, you don't have to be a billionaire real estate developer to enjoy a HUGE tax loophole. The CFC offers this simple alternative: "RENT YOUR HOME 14 DAYS TAX FREE - IRS Benefit".

No doubt you're saying to yourself, "Really? Can this can't be right? There's got to be a catch."

Don't ask me; I'm the last person you should ask for tax advice. I don't know which side of a Return is up. But, if you can believe our very-own, state-funded CFC (and why would they mislead us?), film location rentals fall under the same rules as vacation rentals.

While I don't know anything about taxes, I do know how to google, copy and paste IRS documents regarding vacation rentals.

For example, consider this snippet from IRS Topic 415 ­ Renting Residential and Vacation Property:
There is a special rule if you use a dwelling unit as a personal residence and rent it for fewer than 15 days. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses.
Or the paragraph from the best selling IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes) under the heading "Used as home but rented less than 15 days":
If you use a dwelling unit as a home and you rent it for less than 15 days during the year, its primarily function is not considered a rental and and should not be reported on Schedule E (Form 1040) You are not required to report the rental income and rental expenses from this activity
All right then! But what could they mean by a "personal residence?" IRS topic 415 might just have that recipe:
If you rent a dwelling unit to others that you also use as a personal residence, limitations may apply to the rental expenses you can deduct. You are considered to use a dwelling unit as a personal residence if you use it for personal purposes during the tax year for more than the greater of:
1. 14 days, or
2. 10% of the total days you rent it to others at a fair rental price.
Does this mean that if my property is a personal residence and if I use it for personal purposes two weeks of the year and if I rent it to a film company for 14 days or fewer, I don't have to report any of that rental income to the IRS? Hmmm... you tell me.

But wait! What the heck do they mean by rental? What if my neighbor's cat sleeps in our tree, is that a rental?

Amazingly, the IRS has covered this contingency was well in Publication 527. The "Dividing Expenses" section offers the following guidance on what a rental is:
Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. (This rule does not apply when determining whether you used the unit as a home.) Any day that the unit is available for rent but not actually rented is not a day of rental use.
What then is a "fair rental price?" Here's what Publication 527 has to say about that:
A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area
In other words, this could-might-just-maybe mean that I wouldn't have to report film rental income if I rented our place for film shoots for no more than 14 days in a year and at a fair rental price. That would be sweet, but how sweet?

According to one blogger (whose bonafides are limited to showing up on page 2 of a google search) the "going industry rate per day is your monthly mortgage payment." (Note: I have heard from a reliable source that in the real world, prices vary a lot, but this heuristic fits the bill.)

I've never been much of a mathematician, but this advice inspired a bit of back of the envelope noodling.

According some authoritative-sounding data that appeared on the last real estate flyer that was generously left on our step on its journey to the round file, the average price of an Altadena home is about $800,000. Assuming the nominal 20% down and a 3.5% interest rate, the Altadena buyer might charge $4,000 per shoot-day rental as a film host and $2,000 for a prep day.

Now if this Altadenean home buyer was lucky and hosted three shoots in a year, that would come to a tidy sum of $18,000. But, if this tax break is an actual thing, it wouldn't be just any $18,000; it's a tax-free $18,000. In other words, if this lucky Altadenean had a 35% combined tax rate (i.e. state plus federal tax), this $18,000 from film rentals is like earning nearly $28,000 doing an actual job. That's pretty sweet.

One thing's for sure, on a county-wide basis, these tax-free film rental dollars could add up. But that's a topic for another day.

Of course, I couldn't say for sure if any of this is right. I guess that's why accountants make handsome (non-tax-free) fees. But if CFC is right as rain and you don't always have to report the income from hosting a film shoot...this might be the best tax loophole ever.

Postscript: A respected local film professional has passed along an excellent bit of advice to those who host a shoot. When you get your 1099, be sure your it shows the income as rental income.


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