rental not for profit

[taxmom34]

my sister has decided to stop renting to strangers, and her son, moved into the rental apartment in January 2013. I will be filing her return as rental not for profit ( rent is below fair rental value). however, I've been trying to convince her to change whole house to personal ( it was 100% when she bought it years ago). for the 2013 filing year, I assume real estate taxes can be claimed on schedule A (no mortgage interest) and income reported on line 21. the depreciation is suspended until back in service or sale, right? She is disappointed that her expenses are disallowed (oil $4000 for whole house etc). Her income is so low it doesn't matter what her expenses are , tax liability is zero. My question is : for 2014 would she be wiser to just change to 100% personal and whatever son pays call it room and board and that income is nontaxable.?

[ATSMAN]

Do the Math.

I have had only one client in years who chose to do rental not for profit. The issue that you have to discuss is that rental expenses are deducted on sch A subject to the 2% threshold, and no loss carryover. Also the rent received is listed on line 21 form 1040.
Property taxes, mortgage interest can be deducted on sch A.

If it is a mother - son situation it may be better off going 100% personal, no rent and the son helps with utilities etc.

[mastertaxguy]

State Property Tax Issues

Might want to review or have the taxpayer review the property taxes on the house/home. If it was previuosly assessed as income property, but is now personal use property there may be a lower or change in the property tax assessment.

[ddoshan]

If your are renting to a family member at less than market rates is not the default that it is considered personal use. Maybe double the check the pub that deals with rental of home, I believe that gives more detail as to how to report rental income in various situations.

[Kram BergGold]

Room and Board

If son gives mother money to live in her home it is taxable rent regardless of what you call it. If je just pays share of the utilities (I would have him pay this diorectly to the utility) and gives her money for his portion of food they share this would not be rent.

[taxea]

If he is a family member and not paying FMV rent then it does not qualify for deduction of expenses other than mortgage interest and property tax on Sch A.

[TaxGuyBill]

Here is an option for the future: Charge Fair Market Rent.

As a loving mother, she is likely to give gifts of money to her son that he can use for various expenses, including rent.

[taxea]

then she should gift him enough to pay fair market rent so she can take all the deductions....as dumb as that is.

[JohnH]

If he is a family member and not paying FMV rent then it does not qualify for deduction of expenses other than mortgage interest and property tax on Sch A.

Pub 527 tells me she can deduct other expenses related to the rental property (in addition to Taxes & Interest), as a miscellaneous itemized deduction subject to the 2% haircut. She cannot exceed the gross rental income reported on line 21, but she can use this to zero it out.

"Where to report.
Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casu- alty losses on the appropriate lines of Sched- ule A (Form 1040) if you itemize your deductions.
If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income"

I just worked through a situation exactly like this today - it was fascinating.

[taxea]

I knew that and thought it was just too obvious to state.

[JohnH]

That's understandable. One can't always be sure of what someone else means when they say "then it does not qualify for deduction of expenses other than mortgage interest and property tax on Sch A." The words "does not" and "other than" don't always mean "does not" and "other than". Or if something else can be deducted on Schedule A. Obviously.

Nevertheless, I came back to this discussion because I had another question. If the other expenses of the rental, when added to the property tax and interest, exceed the income reported on Line 21, they can't be deducted. The sum of all these would have to be adjusted downward to an amount which does not exceed the rental income. But I'm wondering if anyone knows if they must be adjusted downward BEFORE the 2% haircut or afterward. Stated differently, does the taxpayer get the full benefit of the Line 21 amount, or must they settle for the Line 21 amount minus the 2% haircut?

[TaxGuyBill]

JohnH, your questions and comments are intriguing me and making me do research again. :-)


In regards to the 2% haircut, §1.67-1T(a)(2) says: Other limitations. Except as otherwise provided in paragraph (d) of this section, to the extent that any limitation or restriction is placed on the amount of a miscellaneous itemized deduction, that limitation shall apply prior to the application of the 2-percent floor. For example, in the case of an expense for food or beverages, only 80 percent of which is allowable as a deduction because of the limitations provided in section 274(n), the otherwise deductible 80 percent of the expense is treated as a miscellaneous itemized deduction and is subject to the 2-percent limitation of section 67.

http://www.law.cornell.edu/cfr/text/26/1.67-1T#a_2

So they must settle for Line 21 minus the 2% haircut.

[JohnH]

Thanks again Bill.
In this case I'm not too fond of the results of your research, but that isn't your fault.

[Gary2]

"Not-for-profit" and "less than fair rental price" are two entirely separate concepts. My reading of Pub. 527 is that you can't deduct any of the expenses (other than tax and possibly interest) on Sch. A when rented at below market rates, even if you were making a profit, because it's classified as personal use notwithstanding the rent received. The not-for-profit rules shouldn't override the personal use rules.

On the other hand, while I haven't done the research, I'm not convinced the Pub. 527 explanation is complete and correct, nor am I 100% confident in my reading. The problem is that the definition of "personal use" in the "Dividing expenses" section is weak. The definition of "personal use" in the "Dwelling unit used as a home" section is more rigorous, but it's not clear whether this should be used to fill the holes in the previous "Dividing expenses" section.

If my A/C weren't broken, I might have the patience to research this further. But the better approach, as already suggested, is either to charge fair market rent or else charge no rent but share expenses.

[TaxGuyBill]

Excellent point Gary.


Hmmm. I knew that a house needed to be rented at Fair Market Value and be the principal residence of a family member in order to be not considered personal use. However, looking at §280A(d)(2)(C), it says that it is personal use if it is rented "by any individual ... unless for such day the dwelling unit is rented for a rental which ... is fair rental".

http://www.law.cornell.edu/uscode/text/26/280A#d_2

§280A(f)(3) even says that §183 (not-for-profit rules) do not apply for a dwelling unit which is used by the taxpayer.

http://www.law.cornell.edu/uscode/text/26/280A#f_3

So now my question is this: If it is considered personal use unless it is rented at "fair rental", what would constitute a non-for-profit rental, that would allow the 2% deductions? Would only renting to an entity (such as a corporation) allow the 2% deductions?

http://www.irs.gov/publications/p527/ch04.html#en_US_2013_publink1000219164

http://www.irs.gov/publications/p535/ch01.html#en_US_2013_publink1000208643