Relative Renting

[Taxadvisor VA]

Taxpayer's son and daughter - in -law will be renting approximately 20% of usable space in his home. Fair rental value is between $1,200 to $1,400 per month. Taxpayer wants to help this young couple and will charge up to $700 per month.
Now unless fair rental value is received am I correct telling this Taxpayer that all income received will be included and no expenses deductible b/c it is considered personal use?

What if young couple wrote a check for $1,200 and taxpayer wrote a check for $500 (Gift) each month? Fair rental value would be received and therefore an expense deduction would be allowable?

What do you think?

Thanks,

Taxadvisor VA

[Burke]

?

What if young couple wrote a check for $1,200 and taxpayer wrote a check for $500 (Gift) each month? Fair rental value would be received and therefore an expense deduction would be allowable? What do you think? Thanks,
Taxadvisor VA

Don't even go there. Renting for less than FMV is considered personal use, so no deductions. But $1,200 X 5 = $6K. That is a lot for renting a home. You must be in NOVA. Are you sure that figure is correct? Seems like they could almost justify the amt paid as their share of expenses, especially if it includes meals.

[Bees Knees]

When you say 20% of the usable space, does that mean 20% exclusive use of that space?

For example, lets say the relative is renting the basement which includes two bedrooms, a bathroom, and rec-room converted into a living room with a small kitchen on one wall. The basement does not have a separate entrance, and the house is otherwise considered a single family house. The relative in reality is only using the bedrooms exclusively. The rec-room, kitchen, and bathroom technically are accessible by everyone in the house and could be considered common space rather than exclusive space. In that case, the relative is really only renting the bedrooms with access to the common use space in the rest of the house. Then instead of renting 20% of the house, the rent is for perhaps a much smaller percentage, and $700 is more in line with fair rental value.

If this were a stranger renting the basement, you usually divide the house into your space and my space. The fact that this is a relative allows the homeowner to rationalize that your space is limited to your bedroom, and the area we set up in the basement for you that is not the bedroom is really our common space that all of us can share. Expect us to do allot of visiting with each other in our common area.

[Snaggletooth]

It's a New World

when it comes to renting to related taxpayers. Or it may be an old world, but in the common practice we are facing a new world.

The new classifications at the top of Schedule E were put there for a reason, and they are not our friend. I believe the regs associated with these classifications have been in place, but the checkboxes were put there to crystallize the treatment of various rental situations.

In conventional practice, most of us as preparers have been telling customers we simply can't take a rental loss on relatives. This is no longer the case, but the old convention is not true (and maybe hasn't been for some time now).

Firstly, we CAN take a loss if taxpayer is charging and collecting FMV for rent. This is seldom the case with relatives, and even at FMV many of them do not pay regularly.

Secondly, the situation is WORSE than not being able to take a loss. Taxpayer can be forced to report what meager income he collects, and not be able to deduct ANY expenses except interest and taxes (which otherwise might be reported on Sch A anyway). Bad Bad Bad!!

IRS is collecting tax revenue on money that is NOT income. There are several instances where the IRS doesn't dance with who brung 'em, and this is one of them.

How do you break the news to a client who comes in and says, "Oh we have rent. Our daughter rents the house and pays us when she has the money."

[DaveO]

This sounds more like a shared expense arrangement than a rental one.

[taxea]

I agree with Burke about not trying to find a way to play the system. $700 is their share of expenses if he doesn't want to rent at FMV then only Sch A expenses apply when "renting to family". Whether the $700 is for expenses on behalf of the son or a gift to the parents it is still under the gift limit for the year. The only way the parents can legally take expenses for the rental is if they rent at FMV with no kick-back.