FMV OF Rent - How low do you go?

[Burke]

I had a client who bought a new house and rented their old house to their son for a reduced amount. It was fine the first year. The second year, he had financial difficulties and they did not press him for rent, but allowed him to continue to live in the house. That's when we had "the discussion." House no longer treated as rental property and was subsequently sold.

[taxea]

I had a client who bought a new house and rented their old house to their son for a reduced amount. It was fine the first year. The second year, he had financial difficulties and they did not press him for rent, but allowed him to continue to live in the house. That's when we had "the discussion." House no longer treated as rental property and was subsequently sold.

I take it a Sch A deduction of the mortgage interest and property tax as their only deductions did not sit well with them. Did they really think they could continue to call it a rental when they were not collecting any rent???? Sometimes people truly amaze me. How much under FM rent did they rent it for? Did you amend the 1st year return to eliminate the Sch E?

[Burke]

No, I think they were fine with the int & re tax on Sche A once I explained to them the situation. They really intended to keep the house as a rental property when they bought their new house. Had some difficulty finding a tenant, son needed a place to live, and were reluctant to throw son out into the street when he fell on hard times. Rent was about 20% below FMV for him, which was reasonable.