Discussion:Family member rent below FMV - ordering rules for real estate taxes?
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Discussion Forum Index --> Tax Questions --> Family member rent below FMV - ordering rules for real estate taxes?
| 30 March 2011 | |
| Say a family member moves into a former rental property for ALL of 2010 and only pays $1,200 rent. Operating expenses are $3,266 (not including any depreciation). Since we cannot take a loss, do we deduct other operating expenses FIRST, and then move property taxes over to schedule A or do we use property taxes and mortgage interest FIRST, and then deduct any other expenses SECOND, if there is any income left to deduct against. ie. 1. Are there ordering rules for excess expenses? 2. I assume the depreciation STOPS (convert it to personal real estate) until it is ever rented to the public again? | |
| 30 March 2011 | |
| yes, but I need to report the income of $1,200. Are you saying I cannot deduct $1,200 of expenses against it? | |
| 30 March 2011 | |
| Or, are you trying to tell me that ONLY the taxes and interest are deductible against the income and any remainder would go to schedule A; all other expenses are deemed "personal" and therefore non-deductible? | |
| 30 March 2011 | |
| I may have it mixed up but my understanding is that when renting to a family member at less than FRV it is considered all personal use. Include any rental income on Sch E. No other deductions on Sch E. Include any mortgage interest and taxes on Sch A. | |
Seaside CPA (talk|edits) said: | 30 March 2011 |
| It's my understanding that if the renter is using the dwelling as their principal residence, but paying less than FRV, the house is considered the owner's vacation home & rental deductions are subject to income limitations. | |
Seaside CPA (talk|edits) said: | 30 March 2011 |
| The days rented at less than FRV are considered personal use by the owner. Interest & taxes would be deducted first, then operating expenses, then depreciation (if applicable). Operating expenses & depreciation can't produce a loss, but could be carried forward. | |
| 30 March 2011 | |
| Ok then, what percentage of the expenses do you all (Seaside and Illini) intend to put to Schedule E and how did you arrive at said percentage? | |
| 30 March 2011 | |
| this is a former 100% rental property, but the family member moved in 1/01/2010 and lived there all year. This is NOT a vacation home. | |
| 30 March 2011 | |
| I'd think twice about that one. Here's the code section (and yes, it's Section 280A) that Solomon cited in the first post:
(2) Personal use of unit. For purposes of this section , the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used— (A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4) ) of the taxpayer or such other person; (B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or (C) by any individual (other than an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental. | |
| 30 March 2011 | |
| I think you may be citing a property that has mixed use -- this property was 100% personal IMO, but the rent is the issue -- I thought you could at least share costs with a family member -- either the income gets reported and expenses netted out to zero, or we don't even report it because the rent is not income, it's a gift from a family member. | |
| 30 March 2011 | |
| I'm citing any property that involves personal usage or imputed personal usage, since the OP seemed to be taking a stab at the Sec 280A ordering rules. The OP also inquired about how to handle "other expenses" and how to deal with "excess expenses." And my point (and Soloman's and Ddoshan's) is that ALL days are personal days in this situation, so when you divide days rented (zero) by total days of usage (365), you get a rental percentage of 0%. This means there are no "other (rental) expenses" and there are no "exccess (rental) expenses" since they're all personal. It now sounds like you're moving away from this approach and legitimately moving towards a Sec 183 argument (no profit motive), which the IRS often asserts in these situations anyway, even though it has Sec 280A in its arsenal. And I think that's fine. | |
Marezidotes (talk|edits) said: | 30 March 2011 |
| Ddoshan wrote "Include any rental income on Sch E. No other deductions on Sch E. Include any mortgage interest and taxes on Sch A."
This is the way I treat it. Since it is 100% personal use, only interest and taxes would be deductible any way. The income would have to be reported since it would not be fair to take the deduction and not report the income. | |
Seaside CPA (talk|edits) said: | 30 March 2011 |
| Days rented to a family member count as days rented (for allocation purposes), even though those days are considered personal use for determining if a home is a vacation home with rental income or rental property with personal use. [Prop. Reg. 1.280A-3(c)(1).] | |
| 30 March 2011 | |
Not true. Here's the whole Reg, with me adding the underlines.
If a taxpayer uses a dwelling unit for personal purposes on any day during the taxable year, the amount deductible by reason of the rental use of the unit during the taxable year shall not exceed an amount which bears the same relationship to the total expenses paid or incurred with respect to the unit during the taxable year as the number of calendar days on which the unit is rented at fair rental during the year bears to the total number of calendar days that the unit is used for any purpose during the taxable year. For purposes of section 280A(e) and this section, the fact that a unit is deemed to be used for personal purposes on a particular day does not prevent that day from being counted as a day on which the unit is rented at fair rental. Use of a unit for repair and maintenance which is disregarded under §1.280A-1(e)(4) shall be disregarded for purposes of this paragraph. | |
Harry Boscoe (talk|edits) said: | 30 March 2011 |
| I have been waiting for this question for twenty years and now I don't care anymore. Refrigpbrerator motivation. | |
| 30 March 2011 | |
| I feel honored to have asked it then! Stop over for a Sam Adams - I've been waiting 20 years to convert a PBR man to real beer. ;-) | |
| 30 March 2011 | |
| I say $1,200 of income, $1,200 of expenses. Interest and taxes first. I like Illini's question. Is it interest or taxes, or do you prorate based upon relative percentages? | |
| 30 March 2011 | |
| Illini .. I suspect your tax program (Sch E) will ask you if there was any personal use of the rental property. If you indicate yes I suspect it will bring up another optional data entry page. Then if you indicate that the property was used 100% personally any expenses except for a couple of things such as advertising will not be allowed. The mortgage interest and taxes you enter will transfer to Sch A with none shown on Sch E. | |
| 31 March 2011 | |
| TCM 1999-226 | |
| 31 March 2011 | |
| Nice trick Vashon tried to pull - Report fair rents, but actually collect something much less. Then, deduct everything under the sky to produce a tax loss. Many years ago I had someone tell me that this trick was foolproof since you are not required to reveal the identity of your tenant to the IRS. | |
Tax Writer (talk|edits) said: | 31 March 2011 |
| Nice trick Vashon tried to pull - Report fair rents, but actually collect something much less.
The thing that I noticed was that they collected $500 per month, but the court deemed that $600 per month was FRV. Why didn't they just fight the FRV determination a little more? They lost the entire caboodle on a technicality. Seriously-- no one could go on Craigslist and find three examples of comparable housing renting for $500 bucks a month? Jeez, talk about missing the forest for the trees. | |
| 31 March 2011 | |
| Given that it was in the early 90's, I doubt many people were advertising properties on Craigslist...
However, I was surprised by that point as well. $500 was pretty close to the fair rental value. Who's to say that a normal landlord wouldn't lower the monthly rent to have good tenants in their house? | |
| 31 March 2011 | |
| I'll tell you what - when you look at some of the Sec 280A examples, they're a little scary. Like a guy rents his place for $59.50 per night, but the going rent in the area is $68.45...
And by the way, what is the time period that we review to determine if rents are "fair?" One month, one week, one year? What if a guy pays $0 for 10-months and catches up the following year? I think every family rental agreement should have a clause that says, "if this lease is deemed to be below fair rent by the IRS, the tenant owes the landlord the shortfall." | |
| 31 March 2011 | |
| "Who's to say that a normal landlord wouldn't lower the monthly rent to have good tenants in their house? "
"...unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental." | |
| 31 March 2011 | |
| "if this lease is deemed to be below fair rent by the IRS, the tenant owes the landlord the shortfall."
Clever. However, if it were that easy everyone would rent to their family for $1/month and take the chance for an audit. I guess you're dependent upon their interpretation of the "facts and circumstances" as Solomon says. | |
| 31 March 2011 | |
| If you think about it a little it makes sense at least to me. You are generally not allowed to deduct personal expenses. We own our home and can't deduct our home owners insurance, depreciate our home, utility costs, etc. etc. If we happened to own 2 homes and let a family member live in one that was not paying FRV (legitimate rental) why should all of a sudden we be able to deduct these personal expenses.
And if we get some economic benefit such as 6000 dollars a year in rent it should be taxable but not an excuse to deduct various other expenses of the top (Sch E) in order to zero this out. It's not only just family members. If I recall any rental to anyone at less than FRV is considered personal use and the same rules would still apply. So plain and simply if you are not getting fair rental value (the amount could be debateable) out of your house rental then tough. The thing that has always befuddled me is defining or determining the difference between this and renting not for profit which is apparently reported differently where other expenses can be taken up to rental income via misc. deductions on Sch A. If you're not getting FRV one could conclude you just might have a not for profit rental. | |
| 31 March 2011 | |
| I may have given this example before .. I had a client that had some property with 2 homes on it. One he lived in and the other he rented out. He charged the person 300 dollars a month which he freely admitted he could probably rent out the home to someone else on the free market for at least 600 a month. The problem was that reporting 3600 dollars rent on Sch E and any mortgage interest and taxes on Sch A made a nice 3000 or so of EIC disappear. As I recall, if we treated it as a not for profit rental and included the rent on line 21 the EIC (whether it should have or not) all of sudden reappears. At least this is what my poor memory recalls. I remember reading, researching and agonizing over this return quite some time.
What was it... personal use (Sch E) because less than FRV was charged or a not for profit rental? | |
| 31 March 2011 | |
| An earlier discussion not long ago on the same topic.
http://www.taxalmanac.org/index.php/Discussion:Rental_to_family_member | |
| 31 March 2011 | |
| I see that but as with this discussion folks seem to be all over the map as to how to handle and or what expenses if any may be deducted. | |
| 31 March 2011 | |
| The IRS MSSP on Passive Activities touches on these issues. In my view, the objective of 183 is to distinguish between (1) a guy that is not trying to make a profit, but is instead trying to offset some of his costs from the endeavor (with "rental income," for example) and (2) a guy who is legitimately trying to make a profit. If 183 is invoked, expenses can go against income and no more. No carryforward of excess expenses. In which case, the "rent" collected really isn't rent (theoretically) in a situation where expenses equal or exceed "rental income," but is more or less a reduction of expense. | |
