Rental loss as renter didn't pay rent for several months

[origun]

Client has a rental and up until 2017 has had a taxable gain. She has been renting to a relative but at an appropriate market rate. However, for last part of 2017 and first part (about 7 months) of 2018, renter had health and employment problems and did not pay rent but continued living there. Therefore my client had a loss in 2017 and again in 2018. It is not a huge loss (c. $3000) as her expenses are mainly property taxes and depreciation (no mortgage, repairs). I am concerned about how to deal with this on the return. Should I allow her to take the loss (which makes me feel a bit uneasy!) …or perhaps allocate 7 months of property use to personal use and 5 months to rental and prorate expenses accordingly? The renter is now back to work so I expect 2019 to be back to “normal”.

[taxmom34]

part of basic course in tax preparation, claim on sch E income received, then expenses in relation to the rental property. claim the loss on sch E

[kathyc2]

part of basic course in tax preparation, claim on sch E income received, then expenses in relation to the rental property. claim the loss on sch E

I think the fact that renter is also a relative is the issue. Question to client would be if this was not a relative, would she continue to let the person live rent free hoping the renter will get back on their feet and become a good tenant again? If not, you may want to consider if the free rent is a gift to relative as opposed to investment loss.

[origun]

Thank you kathy c2 for reply; If considering several months of free rent as a gift (which makes sense), what do I do with rent received for 5 months which was a realistic am't? On Schedule E with expenses (depreciation et al) prorated...or put on what used to be line 21 as "Other Income"? Taxpayer is realistic and will listen to a logical solution but I want to have all my ducks in a row before I call her back!

And taxmom34, I wish you hadn't felt compelled to post your put down: "part of basic course in tax preparation"; I know about Sch. E for income received and expenses with resulting loss or gain; I am an EA and have done taxes for 20 years. I am just deliberating what to do because of the extenuating circumstances in this case and wanted some constructive input from experienced preparers who might have confronted a similar situation.

[Maude Lebowski]

Origon,

Kathyc2 is leading you down the right path. Report the rent received on Schedule E like you normally would. Then pro-rate the expenses between rental & personal. Mortgage interest & real estate taxes for the "personal" part of the year may be deductible on Schedule A if your client itemizes.

[Twin Turbo Z]

As long as it is rented a fair market value then let her take the loses. Was there a lease agreement ? Also if it was ever audited, then according to your questions and answers you received from the taxpayer its easy to prove the hardship the tenant had. Would not be any issues.

[Lion]

FMR from a relative, sure. $0 rent from a relative, that's personal. Even if you try annualizing it, it drops below FMR and becomes not-for-profit rent at best, which doesn't allow losses. Kathy & Maude have it. Personal use for those few months without rent, but client still gets mortgage interest and RE tax on Schedule A, if it helps.

[Dude]

For the home to be a qualified home the owner must have met the minimum usage requirement: https://www.irs.gov/pub/irs-pdf/p936.pdf

[origun]

Dude, Thanks for replying but I'm confused about your info. Pub 936 is about mortgage interest deduction. The home in question has no mortgage. The deductions I'm concerned with and am planning on prorating are taxes, insurance and depreciation for the months when fair rental am'ts. were paid. Am I missing something concerning "minimum usage requirement" that you refer to?

[Dude]

Dude, Thanks for replying but I'm confused about your info. Pub 936 is about mortgage interest deduction. The home in question has no mortgage. The deductions I'm concerned with and am planning on prorating are taxes, insurance and depreciation for the months when fair rental am'ts. were paid. Am I missing something concerning "minimum usage requirement" that you refer to?

Oh, let me clear it up for you. If the home had no mortgage then qualified residence would not apply.

[Twin Turbo Z]

FMR from a relative, sure. $0 rent from a relative, that's personal. Even if you try annualizing it, it drops below FMR and becomes not-for-profit rent at best, which doesn't allow losses. Kathy & Maude have it. Personal use for those few months without rent, but client still gets mortgage interest and RE tax on Schedule A, if it helps.

I disagree. If a lease was done and the tenant (be it a relative or not) quit paying (temporarily as mentioned), why should the owner be penalized. In the same situation with a non relative tenant, the losses are allowed. I see no difference. Now if the owner lets the tenant slide on the back rent, then I am inclined to agree.

[Maude Lebowski]

Now if the owner lets the tenant slide on the back rent, then I am inclined to agree.

That's exactly why it becomes personal. The owner did let the tenant slide and probably because it's family. No one's being penalized. If the owner had taken steps to evict the tenant or the tenant caught up on the rent, I'd treat the situation differently.

[origun]

There was no lease involved. I am waiting for a call back from client to ask her if she would let a non-relative live there rent-free if no payments for 7 months (highly unlikely!). My current plan is prorating expenses between Schedule E (5 months) and personal (7 months). There is no mortgage and she won't be itemizing so no benefit from personal share of property tax. Even though she will have a taxable gain from this venture, she will be getting a refund because of other things on return so think she will accept that breakdown. The bottom line for her will be that she doesn't owe! I appreciate all your input.