VA TP renting property to relative in AL

[Taxadvisor VA]

TP is renting property to his brother in law, who lives in AL. Mortgage and deed are in TP name. Brother in law pays the mortgage and all the related expenses utilities and such. Technically, they don't charge rent but isn't the mortgage payment rent? Since this is a related party transaction, it can get complicated as we know.

My concerns:
* In the absence of a formal lease, do we really have an implied rental arrangement?
* Instead of the TP paying the mortgage and turning around and collecting rent, the brother in law pays the mortgage payment every month.
* If a rental does exist, then an AL non-resident form has to be prepared.

Anybody have any thoughts on this one.

Thanks,

Taxadvisor VA

[ATSMAN]

TP is renting property to his brother in law, who lives in AL. Mortgage and deed are in TP name. Brother in law pays the mortgage and all the related expenses utilities and such. Technically, they don't charge rent but isn't the mortgage payment rent? Since this is a related party transaction, it can get complicated as we know.

My concerns:
* In the absence of a formal lease, do we really have an implied rental arrangement?
* Instead of the TP paying the mortgage and turning around and collecting rent, the brother in law pays the mortgage payment every month.
* If a rental does exist, then an AL non-resident form has to be prepared.

Anybody have any thoughts on this one.

Thanks,

Taxadvisor VA

I have a client in similar situation. He is renting his house to his son-in-law and daughter. They pay an amount equal to the mortgage and property tax in "rent". Dad takes care of all repairs and upkeep. Daughter pays utilities except for sewer directly. Supposedly daughter has a rent to own agreement with Dad but I have not seen it.

We do a Sch E but make sure it does not go negative.

[Burke]

I agree with ATSMAN if he wishes to treat it as rental property but it would have to be at FMR, which may be different from the mortgage payment. I suppose it could be a not-for-profit activity, with income and expenses up to the income.

[taxea]

I agree with ATSMAN if he wishes to treat it as rental property but it would have to be at FMR, which may be different from the mortgage payment. I suppose it could be a not-for-profit activity, with income and expenses up to the income.

I agree with both. However, they need a written agreement as to the terms. Is the TP deducting the mortgage interest and property tax? If the payments being made by the renter do not amount to fair market rent then the TP can only take Sch A deductions and expenses up to the amount of "rent paid". His income is what the renter is paying in mortgage pmts and property tax and the TP would report this on 1040 ln 21, not subject to SE tax. Any other expenses the renter is paying is deducted on Sch A subject to 2% rule and only up to the amount that exceeds the mortgage interest and property tax.

[Nashville]

Fair Rental Value

One of the thing inherent in this situation is the assurance that a fair rental value is being paid. This would include lot rent if it is not being paid separately. Over time, FMV goes up and the mortgage does not. These are some of the factors. Taxpayer does not want to attempt taking a loss with a family member unless he is assured FMV is being paid.

The "income" for Alabama purposes would be the profit made on the rental, if any. If there is no other Alabama income, and the rental profit does not exceed Alabama filing threshhold, no Alabama return would be due. The biggest danger of having to deal with Alabama occurs if the property is ever sold - the "gain" on the sale becomes Alabama income.

[TAXNJ]

Mortgage

TP is renting property to his brother in law, who lives in AL. Mortgage and deed are in TP name. Brother in law pays the mortgage and all the related expenses utilities and such. Technically, they don't charge rent but isn't the mortgage payment rent? Since this is a related party transaction, it can get complicated as we know.

My concerns:
* In the absence of a formal lease, do we really have an implied rental arrangement?
* Instead of the TP paying the mortgage and turning around and collecting rent, the brother in law pays the mortgage payment every month.
* If a rental does exist, then an AL non-resident form has to be prepared.

Anybody have any thoughts on this one.

Thanks,

Taxadvisor VA

Yes, can be complicated. You maybe aware, but in case, info from the TTB:

"Legal Liability to Make Payments
A taxpayer must be legally liable for the loan to deduct interest
on a home mortgage. Payments made on a loan in which the
taxpayer is not directly liable are deductible only if the taxpayer
is the legal or equitable owner of the real estate. [Reg. §1.163-1(b)]

[Nashville]

Legal Liability to Make Payments

Your cite describes requirements for deducting on Schedule A. This entire discussion revolves around Sch E rent.

[Burke]

The IRS will bend a little on the FMR if it is to a family member, on the assumption that they would take better care of the property than a complete stranger (especially out-of-state) would. Just have to be careful it is reasonable.

[TAXNJ]

So

Your cite describes requirements for deducting on Schedule A. This entire discussion revolves around Sch E rent.

So let the Original Poster make the decision as to which reply posts may apply to their interest.

If you read the Original Poster using the word "complicated". So yes, it can get complicated, just sharing info if the Original Poster might be interested, since we had a similar situation where the renter wanted to deduct the mortgage interest as part of their agreement.

[taxea]

Your cite describes requirements for deducting on Schedule A. This entire discussion revolves around Sch E rent.

Not unless he is getting FMR. If he isn't it is Ln 21 and Sch A - no depreciation, no expenses that exceed the income

[taxea]

The IRS will bend a little on the FMR if it is to a family member, on the assumption that they would take better care of the property than a complete stranger (especially out-of-state) would. Just have to be careful it is reasonable.

Not the way I was trained. Burke can you provide me with somewhere I can research this theory?