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FIRPTA Episode 9: Can a Corporation Take a Property Tax Deduction for Personal-Use Real Estate?

Portrait of Phil Hodgen

Phil Hodgen

Attorney, Principal



Assume a foreign parent corporation / domestic subsidiary structure. The domestic subsidiary owns a U.S. residence, and the residence is used (rent-free) by the sole shareholder of the foreign parent corporation.

The domestic subsidiary pays the $10,000 property taxes on the house.

At the end of the tax year, the domestic subsidiary’s P & L says:


May the domestic corporation claim a tax deduction on Form 1120 for local property taxes paid? What are you going to put on Form 1120, line 17?

I am a lawyer and I have three hands

On the one hand, Internal Revenue Code Section 164(a)(1) authorizes a deduction for real property taxes.

On the other hand, the Tax Court seems to be of the opinion that no deductions are allowed to a corporation for expenses tied to personal use of a corporate asset.

On the other other hand, there is Tax Court nuance that says the real answer is that SOME deductions are disallowed – but property tax paid is allowable as a deduction even if the corporate-owned house is used personally by the shareholder.

The Internal Revenue Code: take a deduction

Section 164 says “deduction allowed”

Section 164(a)(1) flat out says “you get a tax deduction for property taxes unless something else in Section 164 says you don’t.”

Section 164(a)(1) does not require business or investment activities

The tax deduction for real property taxes is not tied to a requirement like “engaged in business” or “investment purposes” or anything like that.

That is something we know because IRC §162 exists (trade or business expenses) and IRC §212 exists (permitting a tax deduction to individuals for investment activities).

Look at the language of IRC §162(a). It contains that magic phrase “ordinary and necessary”:

For IRC §162(a) you must prove the expense exists and that it is an “ordinary and necessary” expense. For IRC §164(a)(1), all you have to do is prove that the property tax expense exists. No qualifications, no conditions.

Section 164(a)(1) applies to C corporations

Just for clarity, IRC §164 applies to all types of taxpayers–including domestic C corporations. It is in ​Subtitle A, Chapter 1, Subchapter B, Part VI​ of the Internal Revenue Code, which is titled “Itemized Deductions for Individuals and Corporations.”

The taxpayer who pays gets to claim the deduction

The general principle in tax law is that items like property taxes are deductible only by the person upon whom they are imposed. Magruder v. Supplee, 316 U.S. 394, 62 S.Ct. 1162, 86 L.Ed. 1555 (1942).

If the corporation owns the house, the corporation pays the property tax and is entitled to the tax deduction. How the house is used does not matter. Asset ownership matters.


This means your Form 1120 for this corporation should include zero income (no rent received from the occupant) and a deduction for real property taxes paid on line 17. Right?

Tax Court: “deduction not allowed” vs “some deductions allowed”

There are a bunch of Tax Court cases where a taxpayer lived rent-free in a corporation-owned house. Here are two.

Falsetti v. Commissioner: no deductions allowed

The Tax Court’s typical reaction when a shareholder lives in a corporation's house rent-free:

  • Constructive distribution to the shareholder equal to the rental value of the house; and
  • The corporation’s tax deductions related to the personal use are disallowed.

Here is Falsetti v. Commissioner, 85 T.C. 332, 356 (1985). Emphasis added.

That would seem to deny the corporation a deduction for all expenses (including property taxes) related to personal use of corporate-owned property.

Brock v. Commissioner: maybe not all deductions are disallowed

But there may be some nuance. Maybe some – but not all – deductions are disallowed when the shareholder uses corporate-owned real estate tax free.

Let’s look at another “taxpayer lived rent-free in the house” case, Brock v. Commissioner, 44 T.C.M. (CCH) 128, T.C. Memo. 1982-335​. (Fun fact: the taxpayers were accountants).

Yeah, it’s an old opinion. Yeah, it’s a memorandum opinion.

The Brock opinion seems (woefully murky prose) to say that the corporation is entitled to a mortgage interest deduction (IRC §163) and property tax deduction (IRC §164) even though the shareholder lived in the house rent-free. However, other expenses were deemed nondeductible.

First, the Court decided that the corporation was indeed the owner of the house, and not a mere nominee for the shareholder. The structure was not a sham. At 44 T.C.M. (CCH) 128, 142-143, T.C. Memo. 1982-335:

The opinion then moves on to consider deductions for expenses of ownership. Note how it distinguishes the deductions for interest expense and taxes (IRC §§163, 164) from the deduction for repairs and maintenance, as well as depreciation (IRC §§162, 212, 167).

The key word, where I think the judge pivots from “deduction allowed” (interest and taxes) to “deduction disallowed” (repairs, maintenance, depreciation) is the second “However,” which I have highlighted in bold.

Section 162 requires the taxpayer to show that the expense is an ordinary and necessary expense in a trade or business. Section 212 only applies to individual taxpayers, so we don’t care. Section 167 allows a depreciation expense.

The Brock opinion does not specifically describe how it disposed of the tax deductions for mortgage interest and property taxes paid by the corporation that owned the taxpayers’ personal residence.

But the Brock opinion shoots down the deductions for repairs and maintenance as well as depreciation:

Conclusion: if the expense must be an ordinary and necessary expense of a trade or business (IRC §162) no deduction is allowed for necessary expenses, and no depreciation is allowed.

Reconciling the two positions

I think the more refined version of the Tax Court’s approach to personal use of corporate real estate and the property tax deduction is:

  • If the Code section (like IRC §164(a)(1)) just flat-out allows the deduction, you can take the deduction, even though, for instance, the house was used as a personal residence.
  • If the Code section (like IRC §162(a)) imposes qualifications on the expense before allowing a deduction (“ordinary and necessary”), then the house-related expense is not deductible. Sure, there is an expense. But it’s not ordinary and necessary, so . . . denied.

This approach makes Falsetti and Brock consistent with each other.

My conclusion

My conclusion is that a domestic corporation owning a house that is used by the shareholder rent-free should claim a deduction on Form 1120, line 17 for property tax.

I have done this on tax returns for nonresidents owning houses in the United States in these structures. I’m not saying the reporting position was right, but I will say that the statute of limitations expired in all cases without adjustment.

Am I confident in this position? Yeah . . . . I wouldn’t blush with shame while explaining myself to a Revenue Agent.