I have a client this year who is renting her home to some acquaintances for about 1,400 a month. The amount she could get if she rented to someone she didn't know is between 2,000 and 2,500. For 2009 it is probably a lot less due to the economic times. Maybe 1,700-2,000 a month. I am curious as to how others have handled this time of situation. Do you automatically tell the client they can't deduct their rental expenses because by the IRS rules it is considered personal use or do you claim the rental expenses and let the IRS readjust it if they decide the client cannot write off the rental expenses. I know this client is going to be very upset if she can't write off her expenses and she will most likely go somewhere else but I am going to do the right thing no matter what. I wanted some others opinions before making a decision. In the past I have had clients who rented about 20% below FMV but always with the expectations that the renter was going to maintain the upkeep of the property. But this one is more than 20% so I wasn't sure. Thanks in advance for any opinions offered.
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I'm pretty sure you treat it like a second home, deduct the mortgage interest and property taxes on Sch A and report the rental income on Line 21. -
You can make the arguement that it is not below market rent. The t/p rents to friends because they have less liablility of renters destroying the property. Read page 7-7 TTB 1040 edition bottom left about a court case involving this issue.You have the right to remain silent. Anything you say will be misquoted, then used against you.Comment
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The TTB case is regarding related parties. I don't think the below market rent is an issue if you don't have a related party in the rental.
I have a client with 12 rental houses. He consistently charges below market rents but he keeps them full nearly all the time. He screens his renters very well doesn't allow dogs or smoking and keeps the properties in perfect condition.
He has a waiting list for one of his houses to open up and will often have a referal from the departing tenant wanting to move in.
His business model has served him very well over the years. All the properties are paid off and are in prime condition to sell when he is ready to retire. I'd go to the mat with any auditor that tired to assert his expenses weren't deductible just because the rents are low.In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
Alexis de TocquevilleComment
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I agree. The low rents of your client were for business purposes and not for personal reasons. However, sometimes low rents to a non-related party are for personal reasons and not business reason.Originally posted by DaveO View PostComment
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Critical Question
None of the comments thus far have asked the most critical question.
Is the rental property reporting a profit or a loss??
If the property is showing a rental profit, and the numbers are accurate, any investigation as to whether the property is being rented at FMV is a moot point.
If the taxpayer is deducting a loss, the IRS cannot use the argument of "related taxpayers" against this client. If the loss is ridiculous, they could enforce the "economic reality" argument, but the loss would have to be so obvious that it furnishes prima facie evidence that the taxpayer is not attempting to treat the property economically.
If the taxpayer has a loss, but is not able to deduct it because of passive loss rules, then there is no complaint from the IRS except possibly an invalid increase in basis because of accumulating non-economic treatment over the years, and that wouldn't surface until the property sold.Comment
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I just read this not too long ago:
See TTB page 7-7 "Did you know?" Use of a dwelling unit by any individual who pays less than fair rental value is considered personal use by the owner; therefore, no expenses attributable to that period rental are deductible. Rental income must nevertheless be reported as income. IRC 280A(d)(2)Comment
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