Discussion:Rent Below FMV - Non Relative
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Discussion Forum Index --> Tax Questions --> Rent Below FMV - Non Relative
CathysTaxes (talk|edits) said: | 28 December 2010 |
| I know that rental below FMV makes the rental personal use, but what happens if a long term tenant can't afford the increases? So instead of evicting a good tenant, the landlord keeps him even though the condo's FMV can get $200 a month more? With the current economy being the way it is, many landlords are finding if they increase rents, tenants end up moving out and they can't get replacements. Are losses still allowed, but limited? | |
| December 28, 2010 | |
| I'd argue that if people move out, it's no longer FMV! So the reduced amount seems right in that case. For that small a loss, and that small a difference, I wouldn't worry about it. By the way, I think the rule is that losses with a family member make it personal. Losses below FMV, non family, are probably merely suspended. | |
| 28 December 2010 | |
| Regarding what constitutes personal use. ยง280A(d)(2)(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." Technically, below FMR is personal use - see Jackson vs Commissioner. At the same time the wording under the facts and circumstances seems to give a bit of wiggle room. | |
Tax Writer (talk|edits) said: | 28 December 2010 |
| With the current economy being the way it is, many landlords are finding if they increase rents, tenants end up moving out and they can't get replacements.
I would argue that the rent is reasonable under the "facts and circumstances." I also have a client that rents to a long-term tenant for less than FMV. But the tenant is an excellent tenant on a fixed income-- there is a legitimate business reason for renting at below FMV-- mainly that another tenant probably won't be as good or pay on time. | |
FloridaTaxes (talk|edits) said: | 29 December 2010 |
| I have clients that rent a house to their friends for less than FMV. They do this because first of all the tenants take very good care of the house and don't bother them every time something small breaks. Also, they needed to find renters quickly and these friends were available. So they saved money on realtor fees to find them a tenant, don't have to pay monthly fees for someone to manage the rental, and did not have it sitting there un-rented for several months. It's also around $200 under FMV so I don't think they'll have any problems. If the difference was bigger it might be an issue. This has been going on for a few years now and so far the IRS hasn't asked any questions. | |
| 29 December 2010 | |
| "This has been going on for a few years now and so far the IRS hasn't asked any questions."
Probably won't if there is a positive cash flow. | |
FloridaTaxes (talk|edits) said: | 29 December 2010 |
| Well the cash flow is slightly negative. But FMV is all relative. There are others in the area advertising houses for rent for the same price as theirs and even slightly lower. Most of them, however, are renting for more. The entire housing market in Florida right now is such as mess that I doubt the IRS can prove they are renting it for under FMV. They are renting it for less than they planned on renting it to a stranger, but it's not unrealistic either. These people bought their home when the market started going down so their monthly outlay isn't that high. But anyone in FL that bought a house during the boom that is renting it now has negative cash flow guaranteed.
To the OP- can they easily get $200 a month more or would they have to pay a real estate agent to advertise all over the place and sit on the house for 6 months until someone moves in? I think that is somewhat important but as suggested above I really don't think it's a problem. I guess the other important question is how large is the $200 relative to the rent? I think it's a bigger issue if someone is charging $500 when they should charge $700 versus someone charging $1300 when they should charge $1500. | |
| 29 December 2010 | |
| Fair Market Value (FMV) is such a subjective standard that I think it would be difficult for IRS to make a case in a situation like the one described. Ask five assessors or appraisers about FMV of a specific property and you will likely get five different answers.
Mark g. | |
| 30 December 2010 | |
| the FMV standard is for friends and family. What FMV is, can vary by the type of property, the shape its in, and discounts have been allowed for family keeping it in better shape than a stranger might. It all depends. | |
CathysTaxes (talk|edits) said: | 30 December 2010 |
| To the OP- can they easily get $200 a month more or would they have to pay a real estate agent to advertise all over the place and sit on the house for 6 months until someone moves in? I think that is somewhat important but as suggested above I really don't think it's a problem. I guess the other important question is how large is the $200 relative to the rent? I think it's a bigger issue if someone is charging $500 when they should charge $700 versus someone charging $1300 when they should charge $1500. Italic text
Florida, the clients are in their 70's. It would probably take a lot of work to get the current tenants out and then rented. The current tenants have been there for 18 years, so the condo needs to be updated. The client thinks other condos in the building may be going for $1000 and they are charging $800. | |
FloridaTaxes (talk|edits) said: | 30 December 2010 |
| In that case they should be fine. When I worked for a firm several years ago we had one that we kept thinking was going to be a problem but they were renting the house to someone they knew for half of what they could have easily asked for. | |
