What Is a Rental Pool?
A rental pool is a type of contract that involves a sharing arrangement. Typically, rental pool agreements, the terms of which vary, are commonly associated with real estate. The arrangements resemble timeshares, in that multiple parties divide up the use of the property as well as any associated expenses, such as rent and maintenance. Timeshares can encompass a variety of properties, including homes, condominiums, and resorts.
- Rental pools are agreements between multiple parties to divide the use of a resource.
- Rental agreements are typically created in real estate for tax purposes because it enables participants in a pool to deduct taxes from passive income.
- Rental agreements can be drawn to use other shared resources, such as water, to determine priorities of usage.
Understanding Rental Pools
From a tax standpoint, there are certain benefits as well, i.e., the Internal Revenue Service (IRS) has rules that may limit the losses that can be deducted from rental real estate. A taxpayer cannot deduct losses because the IRS considers rental activities passive income activity, and a loss incurred on passive income cannot be deducted against active income, such as earned wages. However, if a taxpayer has other passive income, they may be able to deduct a loss.
As a matter of due diligence, taxpayers should make sure that all passive income activities are designated as such, so that a deduction can apply should one passive income stream record a loss. Deductions would apply to the following tax year and reflect that year's earnings or losses
Notable is that tax law stipulates that fair rental days are only the days that a property is actually rented out. The law says that fair rental days are not the number of days that the home is available to be rented through the rental pool arrangement.
Types of Rental Pool Arrangements
Perhaps not as well known is that rental pool arrangements for personal property can be made to generate passive income. For example, interested parties may be able to enter a rental pool arrangement that grants them access to certain items that might be cost-prohibitive for them, such as computers, music, and video equipment. Certain types of machinery could also be made available in rental pools.
These agreements can even apply to certain natural resources, including water. Individuals or groups in certain areas may seek contracted access to water stored in wells or reservoirs through a rental pool agreement. In such cases, priority access is common. The agreements will stipulate which individuals have first and secondary priority, as well as any and all provisions related to the time of access.
Example of Rental Pool
Typically, a water-sharing rental pool assigns priorities for releasing water in a district. To accomplish this, categories are created to define a hierarchy of usage. The group at the top of this hierarchy gets access first and the second category is only assigned water, based on pre-defined evaluation criteria and if there is water remaining.