Discussion:FMV Rent Discount for Family Members
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Peabody1313 (talk|edits) said: | 3 October 2007 |
| Where can I find how much the IRS will allow as a discount for rent to a family member? I haven't been able to find a clear definition on how much they will allow. Help. | |
| 3 October 2007 | |
| A discount? The rules are that when a dwelling unit is rented at less than fair value, then it is considered personal use and deductions are limited to rental income Sec. 280A(c)(5). If you are discounting it, then by definition it will be considered personal, I would think. | |
| 3 October 2007 | |
| Less than fair market rental is considered personal use Sec. 280A(d)((2)(C). See Jackson vs Commisioner (1999) - all income had to be reported and no deductions allowed other than interest and taxes on Sch A. | |
| 4 October 2007 | |
| I believe that the IRS has allowed a slightly discounted rent to be considered a fair market rent under the theory that a family member is less likely to stiff you on rent and trash the dwelling and therefore it is ok to offer a slight discount for rent. If the fair market rent is $1,000, you would be willing to take less if you knew the rent will be paid and the property maintained. Don't have a site though so who knows, perhaps another tax myth? | |
| 4 October 2007 | |
| EZ - I think it is an IRS myth. Way back in 1983 in Bindseil vs Commissioner, the Court did so by 20% but doubt the Service would now buy into this in view of 280A(d)(2)(C). | |
| 4 October 2007 | |
| If IRS were to allow for a discount %, it's very rare for them issue instructions to examiners to effect that in pure factual matters. It has the effect of making law with the Internal Revenue Manual and its stepchild documents, and the GAO might say the other two branches of gov't make the law for something like this. | |
| 4 October 2007 | |
| I have heard of the 20% rule, have always used it when a less than fair market is charged.
Why wouldn't the court buy into it now. What's changed except the date. With a bad real estate market, and a plethera (sp) of houses on the market, I think rent values are down. I would go after finding some other rentals that suport a lower fair rent value. | |
| 4 October 2007 | |
| "Why wouldn't the court buy into it now."
Spar - It is not a matter of the Court buying into it but rather the Service buying into that old Court decision. The above cited Code is explicit - below fair market rental is personal use. | |
| 4 October 2007 | |
| Solomon, I am not sure I agree with you that 280A (d)(2)(c) would rule this out.
"... unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental." If the fair market value rent is $1,000 per month to a stranger, then couldn't you argue that a lower rent charged to someone you trust to pay the rent on time and take care of the property, is also a reasonable fair market rent? Just thinking out loud here. | |
| 4 October 2007 | |
| "The reasonable basis standard is not satisfied by a return position that is merely arguable..."
EZ - quote from proposed changes to the new Circular 230. However, the argument you make was what prevailed in Bindseil some 24 years ago. On the other hand, Jackson is much more recent and the TC said no. By the way, in Jackson, the rental was to the parents - a relative - although the same argument ostensibly was not made. | |
| 4 October 2007 | |
| What if FRV can't exactly be determined, as in a single-family residence? You'd have a range of values, and might the low end of the range be true FRV? As to better tenants, the gov't often gets its leased space that way. Lessors will accept less if they view the gov't as a more desirable tenant. Why isn't that FRV? Or are they just being civic-minded citizens? | |
| 4 October 2007 | |
| My 2 cents: If the FRV is $1,000 which rents range from say $875 - 1125, and you rent to a relative for say $900 because of the steady rents, I think you would be okay. But if you rent to the relative for $850, than this would be problem. Unfortunately the burden of proof is on you. The IRS will simply say that they think the rent to a relative is not FRV. It is up to you to prove to them that there are similar units in the area that rent for the rent your charging (granted they are on the low end but they do exist). The point is, do some research on rents and be confident in your rent to a relative is based on facts, not emotion and thoughts of a steady income.
I do wander if the relatives take care of the property like cleaning, cutting grass, etc if that would not allow you to charge less? | |
| 4 October 2007 | |
| To my knowledge, there is no fixed percentage discount which is automatically allowed. Rather, it comes down to the facts and circumstances. I still go by the decision which allows a reasonable amount under FMV is okay as long as the related party can be relied upon to pay timely and not damage the property. The definition of a reasonable amount, though, is up in the air. | |
Death&Taxes (talk|edits) said: | 4 October 2007 |
| The Ref is right; facts and circumstances decide. 24 years versus eight years is not material else Welch vs. Helvering would go out the window because it is much older than that. During the 1980's I handled a large number of equipment leasing audits; cases would seemingly be published each month or so, but each was different and did not serve as precedent. Precedent would be Soliman, which Congress in its mercy more or less vitiated. And even after Soliman the fine line became where was the taxpayer's principal place of business.
Reading Jackson shows the rent listed was $7,200, the FMR as determined by a real estate agency, but Jackson testified his parents paid him $6,000. The Service claimed the rents collected was $8400 in two years and 11700 in a third, but that was not based on FMR but rather on 'bank records.' The Court found no credibility to the Service's claim. Jackson claimed he used $7,200 based "on the advice of one of respondent's revenue agents." So what we have here is a mess; the Court found the rent should have been $6,000, and came to the conclusion that the expenses were limited because the rental was not at Fair Rental Value, but said little as to what was fair rental value. Barranti is another FMR case [T.C. Memo. 1998-427] but in that matter, it was totally unclear whether rent was even paid to the taxpayer. | |
| 4 October 2007 | |
| DT - I didn't mean to imply an older decision was invalid because of a lengthly time lapse as such, but because in Jackson there was no reference to Bindseil it seems to me the Court simply ducked the idea of a permissible discount below FMR for any reason - thus putting that older case on the back burner. However, because the issue was not raised by the Petitioner, I guess I can understand why it was not addressed by the Court. It did accept the FMR estimate from the realty company.
Your analysis is certainly correct that the Service made a mess of some things. At the same time, the Court ferreted that out and came to the correct conclusion - IMHO anyway. | |
Death&Taxes (talk|edits) said: | 4 October 2007 |
And Jackson represented himself.
| |
Peabody1313 (talk|edits) said: | 5 October 2007 |
| Does any one know where I can find a summary of this Bindseil 1983 case. | |
Death&Taxes (talk|edits) said: | 5 October 2007 |
| http://query.nytimes.com/gst/fullpage.html?res=9F04E6DF133BF93AA25756C0A963948260&sec=&spon= Not much there, I know.
I have a CD of Court Decisions from Tax Analysts but it only goes to 1985, and it in itself is ancient. | |
| 5 October 2007 | |
| One thing for sure, you will not find a Notice of Acquiescence. | |
| 30 March 2010 | |
Sec. 280A. Disallowance of certain expenses in connection with
business use of home, rental of vacation homes, etc.
(a) General rule
Except as otherwise provided in this section, in the case of a
taxpayer who is an individual or an S corporation, no deduction
otherwise allowable under this chapter shall be allowed with
respect to the use of a dwelling unit which is used by the taxpayer
during the taxable year as a residence.
I just ran into a situation where the property is owned by a partnership - I guess whoever set up the arrangement thinks that is a loophole for renting to a relative at less than FMV. | |
