Name on mortgage

[BOB W]

And so do I. But I thought we were talking about "Not For Profit" Rental. Not For Profit rental is not personal use according to the Pub.

[solomon]

Regarding residential rental:

As in the Jackson case, a house is rented all year below fair market rent. Below fair market rent does not mean "not for profit." It means "personal use" and thus deductions are limited to interest and taxes on Sch A and income reported on Line 21. The Court relied upon 280A - not 183.

Assume I moved out of my house and put a for sale sign in the yard. I do not have a buyer for over two months. Therefore, I rent it out for a month. Now I consider this as a not for profit activity.

[Bees Knees]

There is a difference between a not-for-profit activity, and a personal use activity.

If I use my office in home to pay personal bills, play solitaire, or any other non-business activity, I can’t deduct any expenses for business use (other than mortgage interest and RE taxes), since it is not used exclusively for business. It is irrelevant how much profit I have, or whether it is a hobby, no deduction is allowed because I do not meet the exclusive use test.

If, on the other hand, I use my home office exclusively for business, but my business is deemed a hobby, then I can deduct expenses for the home office, but only up to income under the hobby loss rules.

Section 280A says no deductions are allowed (other than mortgage interest and RE taxes) for a dwelling unit used by the taxpayer as a residence, unless an area of the residence is exclusively used for business and passes the other office in home tests.

Section 183 says if the activity is not for profit, then expenses are allowed up to income, but you can’t go in the hole.

The problem is, you have to decide which rule applies to a below market rental. A below market rental could be considered a not for profit activity, depending upon facts and circumstances, and thus Section 183 would kick in and limit expenses to income. However, if that below market rental were to a relative, then Section 280A(d) would kick in and treat it as if it was YOU living there, thus, no expenses allowed (other than mortgage interest and RE taxes) because you can’t pass the exclusive use test under the office in home rules.

THAT is the difference.

[Bees Knees]

Additional info…

Renting to a relative is considered personal use only if it is below market rental. Thus, a below market rental could cause two different code sections to kick in, depending on the circumstances.

To illustrate:

1) I rent out one of my bed rooms to a non-relative. The renter has access to my entire house. (Kitchen, bath room, living room, etc.). I can only deduct expenses allocable to the bed room, since the rest of the house is used by me. Only the bed room passes the exclusive use test under Section 280A, even though half of the house technically should be attributed to my renter. If the bedroom only represents 10% of the house, that’s all the expenses I can allocate to my Schedule E rental, even if I show a profit in excess of 10% of the cost.

2) Now lets say I rent that room to a non-relative at below market rental. Now, the expenses could be limited under the Section 183 hobby loss rules because I’m not really trying to make a profit.

3) Now lets say I rent that room to my Dad at FMV. Same situation as number (1) above.

4) Now lets say I rent that room to my Dad at below FMV. None of the expenses are deductible, regardless of profits, because Section 280A(d)(3) says it is the same as if I personally was using his room, thus, none of the house passes the exclusive use test.

[BOB W]

Bees> thanks for your time on this issue, I know you are very busy. One more question, please.

House sharing with relative or non relative. House in one person's name and the second person pays/shares some of the expenses. Is this a rental situation or what?

[Bees Knees]

The technical answer is, it could be a rental, particularly if they are non-relatives. The practical answer is, I would not treat cost sharing as a rental, assuming they are relatives or close friends. For one thing, you can always argue one is gifting money to the other.

[Bees Knees]

Another point....

The other issue with cost sharing, is that reimbursing someone who paid your bill is not income to that person.

Example: I move to NY and stay with Bob for a month while I try to find my own place to live. Bob is a nice guy and normally would not let a stranger live in his house, but because we know each other and are friends, he makes an exception for me.

I agree to “reimburse” Bob for living expenses. I eat his food, I cause his electric bill to increase, I use his water, his telephone, I turn up the heat, etc. etc. etc.

None of these bills are in my name, but I am responsible for the bills as I incurred them through my use. Reimbursing Bob for these expenses is not a gift, nor is it a rental. It is me paying bills I incurred by reimbursing Bob, who paid them for me.

[BOB W]

Thank Bees, I think............

[skhyatt]

Thanks Bees. Does TTB address the "not for profit" issue specifically? I could not find it if it does.

[solomon]

Thanks Bees. Does TTB address the "not for profit" issue specifically? I could not find it if it does.

It does on 5-19 for trade or business but for a residential rental it references Tab 7 - which speaks of mixed use property subject to 280A rather than 183.

[solomon]

There is a difference between a not-for-profit activity, and a personal use activity.

If I use my office in home to pay personal bills, play solitaire, or any other non-business activity, I can’t deduct any expenses for business use (other than mortgage interest and RE taxes), since it is not used exclusively for business. It is irrelevant how much profit I have, or whether it is a hobby, no deduction is allowed because I do not meet the exclusive use test.

If, on the other hand, I use my home office exclusively for business, but my business is deemed a hobby, then I can deduct expenses for the home office, but only up to income under the hobby loss rules.

Section 280A says no deductions are allowed (other than mortgage interest and RE taxes) for a dwelling unit used by the taxpayer as a residence, unless an area of the residence is exclusively used for business and passes the other office in home tests.

Section 183 says if the activity is not for profit, then expenses are allowed up to income, but you can’t go in the hole.

The problem is, you have to decide which rule applies to a below market rental. A below market rental could be considered a not for profit activity, depending upon facts and circumstances, and thus Section 183 would kick in and limit expenses to income. However, if that below market rental were to a relative, then Section 280A(d) would kick in and treat it as if it was YOU living there, thus, no expenses allowed (other than mortgage interest and RE taxes) because you can’t pass the exclusive use test under the office in home rules.

THAT is the difference.

Below market rental to a relative would kick in 280A(d)(2)(A). But what about 280A(d)(2)(C)? Perhaps I am misunderstanding this, but it appears to me both of these cites apply equally to below fair market rental. Therefore, how could below fair market rental to a non-relative fall under Sec. 183? This is in reference to "THAT is the difference." Guess I am too dense to see the difference.

[BOB W]

Read this court case paragraph and see what you get out of it:

Section 183(b)(1) permits a deduction for expenses that are
otherwise deductible without regard to whether the activity is
engaged in for profit, such as mortgage interest and personal
property taxes. Section 183(b)(2) permits a deduction for
expenses that would be deductible only if the activity were
engaged in for profit, but only to the extent that the gross
income derived from the activity exceeds the deductions allowed
by section 183(b)(1).

I am still digesting it.....................

Here is something I found: http://faculty.valpo.edu/jpotts/section183(b)ex.html

[solomon]

Read this court case paragraph and see what you get out of it:

Section 183(b)(1) permits a deduction for expenses that are
otherwise deductible without regard to whether the activity is
engaged in for profit, such as mortgage interest and personal
property taxes. Section 183(b)(2) permits a deduction for
expenses that would be deductible only if the activity were
engaged in for profit, but only to the extent that the gross
income derived from the activity exceeds the deductions allowed
by section 183(b)(1).

I am still digesting it.....................

What is the name of the Petitioner - I would like to read the case. Thanks.

[BOB W]

What is the name of the Petitioner - I would like to read the case. Thanks.

http://www.ustaxcourt.gov/InOpHistoric/rivera8.sum.WPD.pdf

[solomon]

Thanks for the cite BOB W. This has to do with a business. All of the examples under Reg. 1.183-2 have to do with trade or business - none with rentals.

My hang up is 280A(d)(2)(A) and (C). In other words, rent below market whether it is a relative or not is considered personal use and then not subject to 183 - which is to say, only taxes and interest are deductible on Sch A rather than other expenses as well up to the amount of income.