New Sch E Format

[Corduroy Frog]

Client owns Rental Property and his Sister is renting it out. The old format would ask if a family member lived in it for 14 days or more.

The new format doesn't mention family members, but instead asks for numbers of days rented versus personal use days. In years gone by Sister has paid FMV rent, but this year she was in an auto accident and she fell short of FMV payments.

I don't think client should be able to take loss, but I've entered 365 as days rented and 0 as personal use days. Am I doing this wrong??

[Burke]

Under the circumstances, I would not consider this personal use unless this continues long after the situation improves. Many people are behind on their rent. I recently had to set up a repayment schedule for one tenant.

[Kram BergGold]

Burke has a good point

If the sister is going to catch up on the rent, at some future date, then you did things correctly. If the owner is going to waive the unpaid rent, then you have to juggle the days to prevent the loss.

[Roland Slugg]

I disagree with the above replies. Although the circumstances are unfortunate, the law is clear. The property was rented to a family member who paid less than FMV rent.

[Golden Rocket]

Mechanical question

Client owns Rental Property and his Sister is renting it out. The old format would ask if a family member lived in it for 14 days or more.

All the replies have been from accomplished board members, but they have concentrated on the deductibility of the loss as opposed to the mechanics posed in the original post.

The new format has taken away the simple "yes or no" to a family member and asks instead number of days rented out versus personal use. In this case, the sister was in the house all year long, the taxpayer was NEVER using the house, lending one to believe the correct population should be 365 in one bucket and 0 in the next.

But doing this removes the factor of the tenant being the sister of the taxpayer.

Any recommendations for the MECHANICS of populating the two boxes in a way that will properly disclose the situation for what it is?

[BP.]

asks instead number of days rented out versus personal use. In this case, the sister was in the house all year long, the taxpayer was NEVER using the house, lending one to believe the correct population should be 365 in one bucket and 0 in the next.

Any recommendations for the MECHANICS of populating the two boxes in a way that will properly disclose the situation for what it is?

Check the definition of "personal use" to know how to enter the number of days for each type of use.

The answer is in the instructions for Schedule E: http://www.irs.gov/pub/irs-pdf/i1040se.pdf p. E-5

"A day of personal use is any day, or
part of a day, that the unit was used by:

. . .

Anyone in your family . . . , unless the unit is rented at a
fair rental price to that person as his or
her main home,

Anyone who pays less than a fair
rental price for the unit,

. . . "

[ddoshan]

I agree this gets confusing. It appears to me, assuming that the sister did not pay FMV rent any month of the year, then one would indicate owned 366 days with 366 days indicated as used personally. I think 2012 was a leap year? This would basically take away most all expenses or deductions against the rent received. With only the most direct expenses such as postage, advertising, legal, office supplies, etc being fully deductible. Under the scenario above no other expenses such as taxes, Insurance, interest etc. would be deductible on the Sch E at all. On the other hand, if FMV rent was paid for part of the year then the other expenses would be prorated accordingly.

[oceanlovin'ea]

you might ask the client "If the house had been rented to anyone else and they had been in an accident, would he have treated them in the same manner?" Would he have allowed them some sort of compassion in the situation? Would he have agreed to let them pay less for a few months? Sometimes a landlord will be willing to help someone out in out of the ordinary circumstances.

Would that have a bearing on whether he could deduct it or not?

Even if no, would it not be considered part personal and part rental for the year? The time she paid the regular rent could be used vs the time that he allowed her not to pay rent would be personal.

Linda, EA

[taxea]

Client owns Rental Property and his Sister is renting it out. The old format would ask if a family member lived in it for 14 days or more.

The new format doesn't mention family members, but instead asks for numbers of days rented versus personal use days. In years gone by Sister has paid FMV rent, but this year she was in an auto accident and she fell short of FMV payments.

I don't think client should be able to take loss, but I've entered 365 as days rented and 0 as personal use days. Am I doing this wrong??

Did he lower the rent or was she just unable to pay the full rent each month due to the injury? Will she be paying the full rent when her income goes back up? If he didn't lower the rent then she is just behind in the rent. I would show it as rented at FMV for the entire year and report the amount of rent paid. If she is paying FMV it doesn't matter that they are related. If the rent has been lowered permanently then it qualifies as personal use from the time it was lowered and her being family does change how it is reported.

[Snaggletooth]

Draconian

I agree this gets confusing. It appears to me, assuming that the sister did not pay FMV rent any month of the year, then one would indicate owned 366 days with 366 days indicated as used personally. I think 2012 was a leap year? This would basically take away most all expenses or deductions against the rent received. With only the most direct expenses such as postage, advertising, legal, office supplies, etc being fully deductible. Under the scenario above no other expenses such as taxes, Insurance, interest etc. would be deductible on the Sch E at all. On the other hand, if FMV rent was paid for part of the year then the other expenses would be prorated accordingly.

This is the first year I've dealt with the concept of IRS disallowing expenses because of family member, but then expecting to tax the full amount of proceeds. Very similar to their treatment of hobby - wanting to tax ALL the revenue while disallowing as much expense as they can. It should be enough that they just disallow the loss.

This is Draconian. And I've checked it out in TTB and it is true. You can be sure I am altering my approach as best I can such that the IRS does not reap where they haven't sown.