Rental or Not

[cpabsd]

I have a client who is trying to convince me to set up rental
property. He bought a house for his sister in MO in late 2005.
Sister is bad off and only paid "rent" of 100 for the year of 2006.
Client has mortgage interest of $3,000 and looking for a way to
deduct. Client is already deducting RV as second home on Schedule A.
Being a nice person to help someone out doesn't get you a tax
deduction. When the property is sold will these non deductible
expenses count as basis? My brain is tired and I need some
reassurance. Thanks for any help.

[erchess]

It is indeed a rental.

The income must be reported on Schedule E but because his tenant is paying less than fair market value her days of occupancy are considered to be his personal use of the home and he cannot deduct any expenses for that time. Also, even if it were somehow to his advantage, he could not tax himself on fair market rent of the house and then deduct the expenses. See TTB p 7-7 starting with DID YOU KNOW on the right hand side of the page.

On the other hand, I believe that your client could claim on Schedule A the larger of the two "second home" mortgages.