Sch E - Rental Income

[Angie T]

I have a client for 2019 return who is MFS, with rental income. He lives in the duplex and rents the other side. His return was prepared by H&R Block in 2018. On the Sch E, there is no depreciation expense on line 18; no mortgage expense on line 12. The preparer put Other Interest on line 13 that was calculated on form 8990. Does this sound right to you? I never heard of Form 8990, but when I looked it up, it seems like it only pertains to a business. This rental is passive activity.

[Angie T]

Yes, 2018 was the first year. Thank you. I think you did answer my question. You never heard of using the 8990 in this manner either, I gather? I will do the amendment to see if it's worth filing.

[ATSMAN]

Before you jump to conclusions please ask the taxpayer if the second half of the duplex is rented to a family/friend informally and they share the expenses. In my neck of the woods we have a whole community of duplexes and 80% of them are informally rented to family friends and they share the expenses.

[RWG1950]

My customers are retired (MFJ) live on one side and rent to their daughter (at FMV rent) on the other side. They no longer itemize.
The property owner can put all the mortgage interest & property taxes on the schedule "E" (not just the rental 1/2).
Do I understand this correctly ?

[Lion]

Nooooooooo

[TAXNJ]

My customers are retired (MFJ) live on one side and rent to their daughter (at FMV rent) on the other side. They no longer itemize.
The property owner can put all the mortgage interest & property taxes on the schedule "E" (not just the rental 1/2).
Do I understand this correctly ?

Not to repeat your research but what did you base your “understanding” on?

[RWG1950]

I had always thought that in such situations, you are supposed to prorate rental vs personal use and allot taxes and mortgage interest accordingly on the "A" & "E".
The examples above (unless I misunderstand what they are saying) seem to be contrary to such division.

[Rapid Robert]

Not to repeat your research but what did you base your “understanding” on?

I think he was basing it on this immediately preceding comment posted in #5 by FEDUKE404: "Solution: Just assign ALL property taxes and ALL mortgage interest to the "rental" half of the property, and report such on Schedule E. Problem solved! Apparently this solution is quite satisfactory to my friend."

I suspect the comment was made sarcastically, but am not sure, because it was not exactly clear to me whether or not this position was actually being endorsed by FEDUKE404. I almost called it out myself, but decided to wait to see what anyone else thought.

ATSMAN's example of "expense sharing" is also a little fuzzy. I guess he is saying that the other unit in the duplex is treated as a second home by the owner, not a rental? In this case, there would not be depreciation and the mortgage/tax would go on Schedule A, but there would also not even be a Schedule E.

While I'm at it, I am a little surprised that anyone who prepares taxes would say they are unfamiliar with Form 8990, since it applies to any business with interest expense (including a rental treated as a trade/business for QBI purposes). The form must be filed unless one of the exceptions applies, but if you don't even know about the form, how can you determine whether or not one of the exceptions is met?

[Burke]

I think it was quite apparent FEDuke was being sarcastic in that treatment he was discussing a friend took on his duplex. (We need a sarcasm emoji).........

[ATSMAN]

ATSMAN's example of "expense sharing" is also a little fuzzy. I guess he is saying that the other unit in the duplex is treated as a second home by the owner, not a rental? In this case, there would not be depreciation and the mortgage/tax would go on Schedule A, but there would also not even be a Schedule E.

Correct. No Sch E, no depreciation or QBI. It is NOT a rental unit.

[TAXNJ]

I had always thought that in such situations, you are supposed to prorate rental vs personal use and allot taxes and mortgage interest accordingly on the "A" & "E".
The examples above (unless I misunderstand what they are saying) seem to be contrary to such division.

Yes, better to do your own research after reading reply post(s) suggestion/recommendations.

If renting to family members, one should be aware of a number of issues, e.g., have a rental agreement, FMV rent, etc. so as to not fall into issues with the IRS.

As you may know, research is available addressing this scenario.

for instance, see The Tax Book

also,

https://www.irs.gov/businesses/small...state-tax-tips

[TaxGuyBill]

While I'm at it, I am a little surprised that anyone who prepares taxes would say they are unfamiliar with Form 8990, since it applies to any business with interest expense (including a rental treated as a trade/business for QBI purposes). The form must be filed unless one of the exceptions applies, but if you don't even know about the form, how can you determine whether or not one of the exceptions is met?

While you are right, I think most of us tuned out and forgot about the form when we found out that a "small business taxpayer" with gross receipts of less than $26,000,000 doesn't need to file the form. :-)