Expenses On House Rented to Daughter

[RWG1950]

My 77 year old retired customers (MFJ) own and live in a side-by-side condo type of residence. They rent the other side to their adult daughter.
The FMV of monthly rent for this type of unit is about $900 to $1,000, which was conveyed to us 3 years ago when I took the case, by a local realtor.
Daughter paid $10,250 in rent in 2021 - about $850 or so per month. Mom & dad have developed medical & cognitive issues in the last year or so.
Another daughter now handles their affairs. She has provided me with a list of expenses to use on schedule "E" for the rental side.
In additional to the normal rental expenses, she wants me to use $2,100 in electric utility bill expenses the parents paid for the daughter's rental side.
I'm reluctant to do this as, in effect, it would lower daughter's net rent to about $675 - substantially lower than FMV rent.
Was wonder how other preparers would handle this situation. Use the utility expense or not ?
Thanks for comments

[TaxGuyBill]

I think your question should be if you should use ANY expenses.

The parents paid for electric. You can't change that.

If the daughter is paying substantially less than the Fair Rental Value for what she is receiving (a place to live plus electric), that likely disqualifies anything on Schedule E.

[RWG1950]

TGB Thanks for the reply. I value your opinions on cases posted & feel you, in particular, are among the more knowledgeable of us.
It seems to me though, that the daughter is paying enough rent to be pretty close to meeting FMV rent as it stands.
FMV of rent can be somewhat subjective. The realtor can say $900 mo but if similar properties in the area remain unrented for that
price over long periods, maybe the $900 is not FMV.
If I don't use the utility expenses the parents paid, the other "E" expenses seem normal - just as if it were an arm's length type rental.
You should have seen the expenses the prior tax prep office had used on this case.
They even allowed the parents to deduct their daughter's cell phone expense that they had paid, on the schedule "E".

[TaxGuyBill]

But she isn't only receiving the place to live, she is receiving a place to live AND electric. Is that close enough to Fair Market Value? To me, factoring in the electric is required because that is what actually took place.

The Fair Market Rent can be noticeably less for a really good tenant (such as a daughter) than to an unknown tenant. But if it is drastically less, then it isn't Fair Market, in which case it doesn't go on Schedule E anymore.

I've been in similar situations, and it can be really difficult to decide if it is Fair Market or not.

[Twin Turbo Z]

We have several clients with rentals who include utilities in the rent. Yes its not a relative living there, but I can see this going both ways. In our area, water bills are always paid by the owner and they add that into the rents.

[New York Enrolled Agent]

The FMV of monthly rent for this type of unit is about $900 to $1,000, which was conveyed to us 3 years ago when I took the case, by a local realtor.

You don't think the FMV of the rent hasn't risen in the past 3 years? Just curious

[TaxGuyBill]

You need to figure out what the current FMV rent-with-electric is, and compare that with what the daughter is paying.

[TAX4US]

I have owners that in order to keep place from being torn up they considering that by not jacking rent up each year is more beneficial to them. I heard in an IRS audit several years ago about an issue like this where they considered 70-80% FMV to eliminate costly repairs was ok. Maybe it was just the auditors opinion.

[Rapid Robert]

"You don't think the FMV of the rent hasn't risen in the past 3 years? Just curious"

It totally depends on location. In a number of big cities, rents dropped significantly during the pandemic (due to workers going remote and moving to cheaper locations), and are only now getting back to the same levels as 2 years ago. I suspect in the popular "remote" locations, maybe the opposite is true.