Rental Question

[taxjungle]

Hello, I would like to find out what can be done with this rental loss.....

HERE'S THE SITUATION:
My clients (H/W) purchased with Cash their daughter's house last year because she was going through a nasty divorce. Daughter couldn't afford to stay in it, so she did a Guit Deed and sold the house to her parents (my clients) for the remaining balance owed on the house. She was paying rent to her parents at about 20% below FMV. (Which is OK, and the IRS has allowed this since they realize that a relative would take better care of the house). So, I set it up as a Rental Property last year for my clients.

My clients' tax papers show NO rental income for this house for 2011.
What would you do in this situation? Convert the Rental into Personal Use Property and disallow the loses?
(My clients probably won't kick their daughter out of the house).

[ddoshan]

Little confusing .. dau. paying rent but no rental income for 2011? If the dau. is living in the home and not paying any rent I would think that you would treat the home as personal and deduct any interest and taxes on Sch A.
Personally I hate these family rental situations. Do not know if it is kosher but almost think the parents should give the daughter X amount each month (FMV) and then the daughter turn around and pay them that same X amount each month in rent.

[DaveO]

I hate related party rentals too

If daughter paid no rent then taxes and interest on "A" provided they have no other home. I had one of these where the daughter has paid rent slightly below market for a couple of years, no real problem with treating it as a rental. This year Dad decided daughter was having a hard time making ends meet and started paying all the utilties too. We decided the utilities were a gift to daughter.

[taxea]

relative living there all year and not paying rent...I say it is a personal use rental and the only thing that qualifies for expenses is the property tax and interest on a Sch A.

[Gary2]

My clients' tax papers show NO rental income for this house for 2011.

I'm not sure how to interpret this. Is there a line on your income form for rental income, and they wrote 0? Or did they simply not include it in whatever info they gave you? If the latter, then shouldn't you at least ask what the story is?

[Burke]

You say she was actually paying rent at 20% below FMV. Then, if they wish to take any expenses on this house, they must report that rent as gross income. They cannot take any kind of rental expenses and loss and ignore the rent received. I suppose if they wish to ignore the situation as an income-producing property (rental) and treat the "rent" as pay-back for their investment, they may be able to do that. When she has paid back all of their cost of purchase, they can deed the home back to her. No Sche E. But there may be imputed interest.

[taxjungle]

Rental Question

Let me clarify the situation. My clients were paid rent payments (2010) when I set them up as Rental Property. But this year (2011 tax year) client has expenses listed and $0 as Rent Paid. Their dauther may have lost her job and couldn't pay rent.

Any other thoughts?

[Burke]

Got it. I had the same situation last year, and convinced client not to treat as rental property since they did not not take any action to obtain rent payments from their son. Rent for 2010 was zero. At the time they did not know what they were going to do about it. They eventually were able to evict him (contacted a lawyer) and have subsequently put it back into service as rental property in 2011 with new (unrelated) tenant.