How would you answer this?

[Gene V]

From a Newspaper:
Question: About two years ago, I purchased a townhouse for my brother to live in. He lost his home to foreclosure after owning it for 25 years. I have been living with my boyfriend for 20 years and figured it wouldn't hurt to buy some property.
My accountant considered this my home since I don't own anything else, but it is my brother and sister-in-law who are living there. My brother has paid me rent, but not even close to the amount of the mortgage, association dues, gas, electric and phone utilities that I have been paying.
I now have the same situation with my sister who lost her home. I purchased the house from the person who bought the house at foreclosure. My sister hasn't paid me a cent in rent, but she is paying all of her utilities. No association is involved since it is a single-family house. I pay the mortgage and property taxes.
My mortgage broker said that I had to get a loan for this house as an investment property. So far, this is no investment. I have not received any rent and I will need to fix this place up to make it livable for two little girls.
Anyway, my question is, how should both of these homes be treated on my taxes? Is anything deductible at this point? Carol.

[JoshinNC]

Depends

Is there a lease agreement between this person and her siblings? If so, then I say she has rental property and deductible losses, subject to the statutory limits.

If not, than she is making a gift to them for the fair market rental value (or difference in the case of her brother) and is holding the properties as investments.

Need more info to make a determination.

Just curious, what was the answer in the paper (if any)?

[Gene V]

JoshinNC
I was trying to delete this post, figure its the wrong time of year for this, everyone is two busy with there real clients, but here’s the answer from the paper. (Market Watch)

Answer: You are, indeed, a benevolent sibling. But you might want to consider practicing the art of tough love.
You seem somewhat angry, especially with your sister. At they very least, you should be collecting a fair-market rent for each property, because whether or not your brother and sister paid a fair rental price -- that is, what the house would rent for on the open market to someone who is not related to you -- is one of they key determinations in how you must report income from the two places.
The other factor is whether you became a landlord to make a profit. From the information you supplied, it appears that neither occurred for either home.
Here is what the Internal Revenue Service told me: "For determining whether a home is used for rental purposes or for personal use, there are several factors to consider, but the applicable factor in this scenario is whether or not the related family member paid a fair rental price for use of the home. If they did not, then the use of the dwelling unit is considered to be personal use by the owner."
Based upon that determination, the properties cannot be considered rental properties. Thus, Schedule E cannot be used and the majority of expenses will not be deductible. The rent income received from your brother is reported on Line 21 of the Form 1040 due to the apparent not-for-profit determination.
As nonrentals, your primary deductions would be the mortgage interest and property taxes you paid on both properties. However, the IRS says a taxpayer may deduct these expenses only for a main home and a second home, and you can only have one main home at any one time.
Your main home is where you ordinarily live most of the time. In your case, that would be your boyfriend's house. A second home is a home that you choose to treat as your second home even though you may not have used it yourself.
As the IRS sees it, the use of the home by an individual for less than a fair-market price makes the use of the home personal use by the owner. Thus, in your situation, you can only take a deduction for the mortgage interest and property taxes on Schedule A for one of the homes provided to the related family members.
See IRS Publication 527, Pages 5 and 6; Publication 535, Page 5; and Publication 936, Page 2 for additional information. Also, it is always wise to consult with an experienced tax adviser.

[OldJack]

I have to agree with the IRS and the newspaper article as the facts were stated. However, a little planning for the relatives to pay fair rent could make it otherwise. Then, if sister wanted to be charitable she could make some personal gifts to help her siblings.

[Gene V]

OLDJACK, if I read this right, she can deduct the property tax on both homes, but only the interest on one home, the other home would be personal interest and is not deductible.

[Kram BergGold]

Discount

It is my understanding that when renting to a relative you can rent at slightly below FMV and claim the rent as FMV. The reason is the relative is more likley not to damage the place or be a pain. In my opinion this discount should not be more than 20% of FMV.

[OldJack]

OLDJACK, if I read this right, she can deduct the property tax on both homes, but only the interest on one home, the other home would be personal interest and is not deductible.

>>As nonrentals, your primary deductions would be the mortgage interest and property taxes you paid on both properties. However, the IRS says a taxpayer may deduct these expenses only for a main home and a second home, and you can only have one main home at any one time. <<

As I read and agree, the mortgage interest and property taxes on one of the homes is not deductible. However, the non-deductible items would be allowed to increase the basis in the property.

[Snaggletooth]

Family member

Someone correct me if I'm wrong.

There is a mixture (witches' brew if you will) of FMV rental and family loss involved here.

In general, you're not allowed to take a loss when you or any member of your family uses the property for 14 days or more. Your "family" is "vertical" up and down (direct ancestors and descendants) and horizontal (siblings) to the extent of immediate family. I don't think this situation would allow this generous lady to deduct a rental loss on her brother and certainly not on her sister.

If you claim a loss, be prepared for the IRS to disallow it. The lady MIGHT prevail if she can prove fair market rental is being collected. The idea is to negate the "family" factor by proving that she is collecting the same rent as would be the case if the tenant were not family. If this is the case, I believe the code would allow it, but making her case would be a pyrrhic victory not worth the hassle.

Another factor not previously discussed: only a wealthy person could support three households in the manner described. It's very possible her income exceeds the threshold for being able to deduct a loss anyway, and the loss becomes an item for Form 8582.

A question I have: my understanding is that only her primary home and one more home can qualify for conventional schedule A interest. Can the disallowed interest on the remaining home qualify as investment interest on Form 4952??

By the way, congratulations to the paper who gave this question a very straight and reasonable answer. Doesn't always happen.

[Brad Imsdahl]

As I read and agree, the mortgage interest and property taxes on one of the homes is not deductible.

Property taxes are deductible on all real estate owned, regardless of how the real estate is used.

It is mortgage interest that is limited to two homes used for personal purposes; the home you live in and one second home.

[OldJack]

Property taxes are deductible on all real estate owned, regardless of how the real estate is used.

It is mortgage interest that is limited to two homes used for personal purposes; the home you live in and one second home.

True... I stand corrected.