personal use rental property

[theresa d]

situation: parents own a two family house and rent the apartment to son and daughter-in-law for 600\month. the FMV of the rental property is 1000\month. Since this is a below FMV rental it is considered personal use property. Therefore parents must pick up the rental income but cannot deduct any expenses attributalble to the rental period since they are considered personal expenses. Questions -what about the exclusion of gain on the sale of the property. Can the entire gain on the sale of the house be excluded ( assuming it meets all the other criteria) or is the sale allocated between the parent's apartment and the son's apartment and gain on the son's apartment subject to tax ? Does the fact that the son's apartment is considered personal use property change the tax treament?

[Roland Slugg]

You sure about that?

Since this is a below FMV rental it is considered personal use property. Therefore parents must pick up the rental income but cannot deduct any expenses attributalble to the rental period since they are considered personal expenses.

Hmmm ... you sure? If those days are all counted as personal use days, then the property is rented for fewer than 15 days (at FMV), and if property is rented for fewer than 15 days, the rent doesn't have to be reported as income. If the rent does need to be reported as income, then don't the allocations come into play that permit a limited deduction of rental expenses?

Is the apartment a separate building? Or is it attached to the main house? If it's a separate building, AND it's treated as a rental property, then if the entire property is sold, I believe an allocation of the SP will need to be made, and only the gain on the main home will be eligible for the §121 exclusion. In all other cases, no allocation will need to be made, but any depreciation taken on the apartment will be taxable.

[Uncle Sam]

Personal Use Rental Property

The way I read the facts, parents have their own portion of personal residence. The other half of residence is rental property.
Since rental property is rented out at 40% below FMV, then all rental income is picked up, but except for real estate taxes and mortgage interest (if any), all expenses are given a 40% discount for tax deduction purposes.
Upon sale of residence, the §121 exclusion applies only to parents' portion of residence, capital gain (subject ot any depreciation recapture) on the portion rented out to son.

[Unregistered]

Not for Profit

I agree with Uncle Sam. May be in view of the rental income being so far below the market, one could construe it as a Not for Profit Activity (assuming when child moves out it will not longer be rented). In that case, other than interest and taxes, any expenses up to the amount of income would go as Miscellaneous on Sch A.

[Armando Beaujolais]

It's about IRC section 280A, "Disallowance of certain expenses..."

Below fair market value rental only disallows the expenses. It doesn't make the rental portion a principle residence for the 121 exclusion. It's still rental, forget about pretending it's been rented for only two weeks and you don't have to report the rental income.

[theresa d]

thanks

for all the responses. I agree with Armando-apartment would be rental property and subject to capital gains. needed to clarify my thought process. thanks for the imput!!!