Related Party Question #1

[Snaggletooth]

Hypothethical Question. John has been married before, and divorced. Then he marries Gretchen. Gretchen has a grown child, Paula, by a former marriage.

John (alone) buys some rental property for $100,000, but he rents it to Gretchen's daughter, Paula. Assume it loses $5000 per year for five years. There have been $25,000 of losses which he couldn't take because Gretchen's daughter Paula is a related party.

After five years, John and Gretchen can't stand each other and divorce. John keeps the house but Paula has been faithfully paying rent and doesn't really have anywhere better to go, so John continues to rent to Paula. John and Paula now are not related parties.

1. Can John now deduct rental losses after his divorce from Gretchen? (I think so).
2. Can John now recover any of the $25,000 in losses incurred in previous years? Sounds like I lay awake contriving questions like this, but these strange things really do happen.

[Lion]

If Paula was not/is not paying FMR, I think you have personal use and no losses.

I also think -- but you research -- that John and Gretchen can divorce, but that his stepdaughter remains his stepdaughter.

Where have you researched your questions, so no one duplicates your efforts?

[Snaggletooth]

Lion, thank you for your usual contributions.

I'll try to walk through and answer. First of all, these are not actual people and not actual numbers, but I do have several customers with rental property, and marital problems that I don't know about until they occur.

Secondly, you give me too much credit if you think I have researched this. Actually I do some research, most commonly from TTB, but I will get lazy and come to the board if I believe a situation is difficult to analyze from code and regs. In this case, the example may be so obscure that code/regs do not address. Obscure cases that are dimly addressed or ambiguous will sometimes end up in Tax Court if the taxpayer wants to jump through those difficult hoops.

From your response - I gather that "once a related party, always a related party" and asked me to confirm with research. I don't have a clue as to where.
Also from your response - If the tenant was actually paying FMV, then a loss can be taken even with a related party. I did research this one. TTB did not address it, but referred me to Section 267(c). Apparently no loss can be taken on a related party even if they are paying FMV rent.

Thank you for your response. You are good to answer myself and others.

[New York Enrolled Agent]

Lion, thank you for your usual contributions.

From your response - I gather that "once a related party, always a related party" and asked me to confirm with research. I don't have a clue as to where.


Thank you for your response. You are good to answer myself and others.

Try Reg. 1.152-2(d)

[Rapid Robert]

Like Lion said. Pub 527 tells us that a day of "personal use" for a rental includes:

"A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.

• A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as their main home and pays a fair rental price. Family includes only your spouse, siblings, half siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.)."

"Can John now recover any of the $25,000 in losses incurred in previous years?"

No. These are not like unallowed passive losses that are carried forward (ignoring whether there was any personal use in the first place).

[Snaggletooth]

Thank you NYEA. Appears Lion was correct.

[Lion]

Not everyone remains a related party after a divorce, but stepchildren might -- so please research if you have that situation in your practice. (I think I had a situation something like that decades ago in an HRB class.)

Also, notice Robert's detail about "...unless...pays a fair rental price." Your situations referred to losses, but not whether related renters paid FMR.

If you're anticipating a client going to Tax Court, you better have the facts and documentation laid out with more than this Forum and "some research, most commonly from TTB." TTB and the IRS Pubs are good starting points, because they give examples, define IRS lingo, and give links to the IRC, court cases, and other authorities.

Do your own research. Then post if you want help interpreting the code.