Rental Property

[tax123]

I have an interesting situation with one of my clients who purchased a condo to rent out to their daughter and her roommate while she was away at college. So the idea originally was that both the daughter and her roommate would pay a fair rental price and then all expenses would be deductible to my client against rental income as it wouldn't be considered personal use. However, as things turned out, only the roommate ended up paying rent and the parents covered the daughters part. Which brings me to this question: since the rental is now considered being used for personal use, yet at the same time is also being rented out, are any of the expenses deductible? or does the fact that it was used for personal use 365 days last year override the fact that it was rented out for 274 days? Everything I've read on the subject talks about what to do if it's mixed-use property, but it's always in the context of one or the other (e.g. you used the property for personal use for x number of days, and then you rented the property out for x number of days), but doesn't seem to deal with what to do if those things took place at the same time (e.g. the daughter and renter both lived in the condo at the same time). Any thoughts would be greatly appreciated as I'm not sure how to allocate everything in this situation.

[Koss]

Personal Use

Only part of the property was used for personal use.

Suppose for the sake of argument that it is a two-bedroom apartment, and that the two girls have equal access to all common areas. Suppose further that the roommate paid rent that is half the fair market rental value of the entire apartment.

Just treat it as two properties. Cut everything in half, starting with the basis.

In other words, half of the property is a rental property, and the other half is not.

For that half that is not rental property, there was no income, and none of the expense is deductible.

For that half that is rental property, you report all the rent, and deduct all of the expenses.

BMK

[taxea]

Koss is right. That is exactly what i would do. 50% rental/expenses. other 50% you can only take 1/2 property tax and mortgage.

[tax123]

Thanks for the comments! So are you saying that on schedule E I would only report half of everything, including basis for depreciation purposes, and that's it? or would I also include the amounts for personal use and state it as such? I really appreciate the input! The latest development is that for 2013 this same client is going to gift their daughter some money and then she is going to pay them a fair rental price, in hopes that they'll be able to claim all the expenses as deductions. What are your thoughts on that?

[DaveO]

Thanks for the comments! So are you saying that on schedule E I would only report half of everything, including basis for depreciation purposes, and that's it? or would I also include the amounts for personal use and state it as such? I really appreciate the input! The latest development is that for 2013 this same client is going to gift their daughter some money and then she is going to pay them a fair rental price, in hopes that they'll be able to claim all the expenses as deductions. What are your thoughts on that?

That was going to be my suggestion. we'll see if more knowledgable posters comment.

[ddoshan]

Wouldn't you have to only use the square footage of the one bedroom, if a 2 bedroom unit, and or any other area in which the roomate may have exclusive use, as the daughter has access to and uses the rest of the unit. I don't see any difference than if I owned a home and my brother paid me 500 a month or whatever to live there also. I don't think I would or could split the home expenses such as utilities etc. 50-50.

[Gary2]

I'm not so sure about this. Unless there's a real split of the unit into two apartments, it sounds like there's one entire apartment that was rented out for half the going rate - making it a not-for-profit rental, period. The fact that all of the rent was paid by one of the two tenants who happens to be unrelated doesn't magically convert it into a for-profit rental.

[Gretel]

Wouldn't you have to only use the square footage of the one bedroom, if a 2 bedroom unit, and or any other area in which the roomate may have exclusive use, as the daughter has access to and uses the rest of the unit. I don't see any difference than if I owned a home and my brother paid me 500 a month or whatever to live there also. I don't think I would or could split the home expenses such as utilities etc. 50-50.

I also tend to see it as the same situation as renting a room at home, doesn't matter if it is the second home, or deemed to be the second home since use by daughter is considered personal use by parents. Be aware that there is no loss allowed if renting out a room.

[Burke]

I also tend to agree. However, they would have to report the rental income rec'd for last year and could deduct expenses attributable to that portion down to zero. No loss.