FMR to Related Party

[Burke]

I have heard that IRS will acquiesce to a lower-than-fair-market-rent to a related party. Fair rental value is $575; related party pays $475. Will this allow the treatment of property as rental?

[Roland Slugg]

Burke, it is out of character for you to post an "I have heard" message here. If you actually meant "I have read," then please tell us where you read this, as it would mean a significant departure from the IRS's published information about rental income, not to mention the meaning of Code §280A(d)(2)(C) and §280A(d)(3)(A).

[Burke]

I was hoping you could provide a cite; its something I have heard for years and I can't tell you where or when at this point, except for the fact that I believe it may have come from IRS auditors who have significant leeway sometimes. This forum is good for such cites to which we can turn to for documentation when it exists. And I will admit, a lazy way to obtain information instead of taking time to research myself. And the cites you furnished cover the subject very well.

[DonB]

I also heard this would be accepted on audit; and the rent to a relative could be 90% of FRV. The theory was that a relative would take extra good care of the rental and less of the landlords time therefore justifying a lower rent. I believe i heard this in a seminar.

[Kram BergGold]

I read

A long time ago I read that renting to a relative at below FMV was okay. Either I read or decided that 80% or more of FMV was ok. I am thinking there are court cases on this.

[Burke]

I found quite a number of sites via Google on this subject, and some were based on Tax Court rulings and Rev Procs. Particularly one which involved a 1031 exchange. Interesting.
Adams v. Commissioner, TC Memo 2013-7; Rev Proc 2008-16.

[taxea]

So....what is acceptable, if any, to the IRS? My understanding is that if property is rented under FMR to a relative then it is considered personal use and expenses are Sch A, income is Ln 21.

[Burke]

I think it is a moving target. IRS Code does not address it; however, in practice (audits) and court rulings it appears to have been upheld on occasion.

[New York Enrolled Agent]

I think it is a moving target. IRS Code does not address it; however, in practice (audits) and court rulings it appears to have been upheld on occasion.

Burke - general rule is you must rent at a fair rental to avoid the limitations under §280A. The Tax Court in Adams TCM 2013-7 held it was acceptable for rent to be SLIGHTLY lower when the relative was doing on going work on the house. I think $475 compared to $575 is more than slightly lower and would not be fair rent given no other extenuating circumstances.

I think those who suggest the IRS will automatically allow a certain % "discount" are not correct. As always, facts and circumstances control. I think your taxpayer misses the mark.

[Burke]

I think you are right.
Also, I have found HUD publishes a site with FRV all across the country which, while not mandated, is what they use for their qualification purposes. Enlightening to review & compare. https://www.huduser.gov/portal/datas...l_history.html. They also publish these values for past years as well. This (new) client was basing FRV on the house payment. I don't think so.....

[taxea]

I think you are right.
Also, I have found HUD publishes a site with FRV all across the country which, while not mandated, is what they use for their qualification purposes. Enlightening to review & compare. https://www.huduser.gov/portal/datas...l_history.html. They also publish these values for past years as well. This (new) client was basing FRV on the house payment. I don't think so.....

Isn't this what HUD uses for Section 8 purposes. Which would mean this is the amount Section 8 is willing to pay while the tenant pays the balance of the rent (the difference between Hud amount and actual FMR).

[Burke]

Rental values seem to be consistent with the amount actually charged, within all the areas/states that I checked. Doesn't have to be the only method used. This table uses averages in a particular county. Could vary depending on the neighborhood the rental property is located in.

[taxea]

I agree. I also agree that anything under FMR is personal use.