Discussion:Can a family member share a rental?
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Actionbsns (talk|edits) said: | 13 March 2007 |
| My client's dad moved into her rental property last year when one of the tenants moved out. She now has dad as one tenant and the same old tenant who has been there for years. They share rent 50/50. Does dad preclude us from taking any schedule E deductions at all? | |
| March 13, 2007 | |
| You can only claim rental deductions if a rental is "for-profit".
I assume Dad is NOT paying rent. What I have done with these situations, is claim that the the property is 50% "for-profit". Allocate all expenses 50% to rental 50% to Schedule A (if qualify as 2nd home) or non-deductible. Now Let's say Dad is paying 40% of FMV rent. The IRS allows you to discount FMV rent by 20% when rented to a family member. So now I would say that property is 75% "for profit" and then do the same allocations as above. 75% = 50% (tenant) + [50% x (40% รท 80%)] (dad) I am not sure if this is correct...and I'd rather not know. I am going to plug my ears and chant "LA LA LA" now. | |
Actionbsns (talk|edits) said: | 13 March 2007 |
| Dad is paying his full 50% of the FMV of the rent. So what I'm hearing here is that we can proceed with the schedule E as though dad were just some other renter. I had a client who was renting their second home to their daughter and was told that they were precluded from being able to use the advantages of the schedule for this property. The daughter may have been living there rent free, however. I inherited that client just before they sold the property. I read through the instructions for Sched E last night, but might have been just tired and didn't see anything about renting to family member. I'll take another look today and see if I find anything. Thanks for the responses, though. My new client will like the outcome a whole lot better. | |
| 15 March 2007 | |
| IRS requires at least 80% of fmv of rental to relative or they may tax at fmv if detected taxea | |
| 7 April 2007 | |
| Agreed w/ above. PVVCPA I am here b/c of your link on the other page. I think you missed the part where Actionbsns said that Dad and other renter share rent 50/50. Just curious you and Taxea, where did you hear that IRS allows 20% discount off FMV of rent when renting to family member. I did not know that. | |
| April 7, 2007 | |
| Jessica,
No, I caught that. I included the 50% renter and 50% Dad in my math. Action's last post stated that the Dad was paying full FMV for his half, so my post is not applicable for this particular case. But, I was wondering what you thought of my example if the Dad was paying less than FMV? | |
Mtmckeecpa (talk|edits) said: | 7 April 2007 |
| JAD,
This is the reference from PPC regarding the 20%. Bindseil, Lee A. TC Memo 1983-411, 46 TCM 764 (1983). | |
| 7 April 2007 | |
| Mtmckeecpa, thank you.
Paul, It sounds reasonable. I just wonder if IRS would have basis to say 280A instead. If Dad's rent isn't FMV, then you are not under 280A(d)(3), so 280A(d)(2) applies instead (personal use includes use by any family member), therefore expenses would be limited. I think the latter scenario is more likely than what you have proposed. The reality is that Dad isn't renting 40% of the home, he is renting 50%. All that said, fortunately at this time none of my clients are in this situation, and I have only scanned 280A for this post. I have not read it closely for a while. Is the return already filed or does this impact 4/17 for you? | |
| 7 April 2007 | |
| In the Bindseil case they allowed the 20% because there was "evidence the tenants (taxpayer's parents) were expected to take unusually good care of the property and management fees would be avoided". In another case (Jackson, TC Memo 1999-226) the Tax Court disallowed the 20% and said it was not rented at FMV and therefore disallowed the rental expenses. Sorry I don't know why the second case had a different outcome. But I do have a question related to this..I just was researching this for a new client who rents a house to her disabled son at way less than FMV. Her previous preparer took all the rental expenses so of course there was a loss. I'm guessing previous preparer didn't know she rented to her son (I know because I also do his tax return) There is no way he can make enough to pay her FMV. Seems I need to include the rent he has paid on Sched E with no rental expenses to offset it - and does that preclude me from taking the interest and taxes on Sched A as a second home? If so, if he pays no rent at all could they claim the int and taxes on Sched A as a second home? | |
| April 7, 2007 | |
| Jessica, Thank you. That is kinda what I thought. Perhaps, I could prove that the Dad is forbidden from using the garage and the backyard, thus the discount in rent. :) | |
| 7 April 2007 | |
| SKPCPA,
If property is not rented to make a profit (as in your case), you can deduct rental expenses only up to the amount of your rental income. Deductions are taken in the following order: 1)interest & taxes 2)insurance, utilities, etc., and 3)depreciation. Report rental income on 1040, line 21 and deductions on Sch A as miscellaneous deductions. If rental qualifies as second home you can report as mortgage interest. To qualify as a second home for the interest deduction while renting to others you must use home for more than the > 14 days or 10% of # days you rent it. So, I think if he is renting the home for the entire year, I don't think it would qualify as mortgage interest. | |
| 8 April 2007 | |
| Wonder if that applies to below market rate renting to a "friend with benefits". | |
| 8 April 2007 | |
| We are not really clear here if Dad has separate living quarters in the dwelling unit. For example, if this is a duplex, Sec. 280A should not even apply here. | |
Actionbsns (talk|edits) said: | 9 April 2007 |
| I just caught that this thread had re-surfaced. Riley, It's a 3 bedroom, 2 bath regular house in California. There are two people living there and one of them happens to be dad. The total rent paid is equivalent to fair market value for the area and they each cough up half every month. Each tenant has his/her bedroom, but share the rest of the house, yard, garage, you name it, they share it. The return has already been filed. It would be good to know it's done right at this point. | |
Actionbsns (talk|edits) said: | 9 April 2007 |
| I reported it on Schedule E with no overriding restrictions. I'm trying to link to Sec.280A right now. | |
Actionbsns (talk|edits) said: | 9 April 2007 |
| I just read 280A(d)(3)(A) and it clearly states "Rental to family member, etc., for use as principal residence (A) In general: A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person's principal residence." Dad is paying a FMV rent for his part of the dwelling, it's his principal residence, and she doesn't stay there at all, in fact she's in Hawaii, the property is in California. So I think I'm good. | |
