Also known as: personal expenses · living expenses · family expenses · § 262 expenses · nondeductible personal expenses
Written by attorneys · grounded in primary & secondary sources — see below
Costs incurred to maintain an individual's household, daily needs, or support of family members. These outlays are distinguished from expenditures made to acquire property or to conduct business or profit-seeking activities.
Philip Powell, an indigent client facing criminal charges, retained Penelope Price to represent him without charge through a law school clinic. After several weeks of proceedings, Price gave Powell $400 in cash to cover rent and groceries for the month. The payment qualifies as a permitted modest gift because it addresses only basic living needs and was not promised before retention or sought to be repaid.
Pedro Pacheco purchased Blackacre from a seller for $50,000. He paid $20,000 from his savings and borrowed $40,000 from Pacific Bank, giving the bank a mortgage on the property. Pacheco used $30,000 of the loan to complete the purchase price and the remaining $10,000 to pay his own rent and utility bills. The bank's mortgage receives purchase-money priority only for the $30,000 applied to the acquisition.
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A lawyer may provide modest gifts for food, rent, transportation, medicine, and similar living expenses when representing an indigent client pro bono. The gifts must not be promised before retention or used as an inducement to continue the relationship, and the lawyer may not seek reimbursement from the client or anyone affiliated with the client.
A mortgage qualifies as a purchase-money mortgage only to the extent its proceeds are used to acquire title to the mortgaged real estate. Any portion of the loan applied instead to the borrower's general personal expenses receives only ordinary lien priority and is junior to an existing judgment lien.
Section 262 bars any deduction for personal, living, or family expenses to ensure that only costs incurred in earning gross income reduce taxable income. Without this prohibition, taxpayers could deduct ordinary household outlays and convert the income tax into a tax on something less than net income.