Name on mortgage

[BOB W]

Thanks Bees, that is reasuring.

[Bees Knees]

Below FMV is very subjective. Who is to say what really is FMV?

The going rate for a 2 bedroom apartment may be $1,200 in one location, and $800 two blocks away, because the neighborhood is perceived to be worse.

My guess is below FMV is really not going to be an issue with a legitimate rental activity. Only when someone is trying to rent out a vacation home, or rent to a relative.

[BOB W]

I feel that a lot of real estate rentals may be in the Below FMV Rental. Maybe not by much, but still below. Does anyone know IRS's posistion on how low- low starts before rental expenses become at-risk? And how to argue, if questioned, a reason for the lower rental value being collected?

I was also under the impression that equity growth was a factor when considering a for-profit-rental but the courts, in the case we reviewed, seemed to separate investment issues from rental income/expenses issues. Did I miss something again?

[skhyatt]

No need to apologize Bob. I know I certainly learned some things from the give and take. I thought it was an excellent thread.

[BOB W]

Please accept my sincere apoligies for putting all you through this "on going" thread. But it shows the caliber of the posters who care when someone (me) doesn't get it right.

Thanks Solomon, Skhyatt and Bees. I am now a better person.

[solomon]

Excellent summary by Bees - that is my understanding as well.

[Bees Knees]

OK, I’ll try to put some perspective on this subject here.

The IRS Pub that Bob quoted said that if you do not conduct your rental activity for profit, hobby loss rules apply. You report the rental income on line 21 and deduct expenses up to income on Schedule A.

I couldn’t find anything in that quote that said below fair market value rental. All I could see was a rental where you were not trying to make a profit.

I suppose in theory, you could have something where you rent out your unit at FMV, but don’t ever try to make a profit because maybe you don’t run it like a business. You take forever to getting around to fixing things, or advertise for new renters.

Or maybe you are holding on to the property as investment property, and only occasionally rent it out, but it stays vacant for years.

Whatever the circumstances, each time you actually do rent it out, it is for FMV. You just never really try to make a profit by keeping it rented, so hobby loss rules kick in under Section 183.

The section 280A rule kicks in when the rental is below FMV. Thus, the code and TTB page 7-7 say, it is personal use when it is below FMV rental, thus no expenses allowed (other than interest and taxes), and Section 183 hobby loss rules do not apply.

I think that is the difference. In other words, if you do rent it at FMV, but don’t conduct the rental as a for profit rental, then hobby loss rules can apply.

[BOB W]

I'll make you a bet that 75% of all schedule E's are at risk of loosing their deductions due to FMV and someone's interpertation of FMV. $500 or $600 a month could be considered close.

[Bees Knees]

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.

I think I have to retract this one. Section 280A(d)(2)(C) seems very clear, as illustrated in the court case cited, that rental to a non-relative at below FMV is considered personal use by the owner...the same as if it was a relative rental at below FMV.

Both are considered personal use.

So I believe the IRS Pub is wrong saying you could have a hobby loss situtation from a below market rental. I don't see how, given the fact that Section 280A(d)(2) seems to include relative and non-relative below market rentals.

Section 280A(f)(3) even says Section 183 does not apply if Section 280A applies.

[skhyatt]

Thanks for your feedback Solomon. I need to read that court case.

[solomon]

Yes - that is my understanding. If you read the Jackson case, the Court relied upon a realty agency to determine the FMR. There is nothing to allocate if it is below FMR. Only taxes and interest under Sections 164 and 163.

[skhyatt]

Wouldn't it be simply referring to 280A(a) AND 280A(d)(2)(C) ??

Here I am talking about the part on page 7-7 where it says no expenses and still must report income. Under "did you know?"

[solomon]

Solomon, in TTB, 7-7 under the section, "Did you know?" It says if considered personal use, then no expenses are deductible, but income must be reported. Isn't that talking about only the period during the year where use is considered personal? That's the way I read Sec 280A(d)(2). I'm trying to reconcile this section with the section above on that same page, "Allocating expenses:Personal vs Rental"

Yes. Regarding Allocating in TTB 7-7, note the rental is at FMR but because ostensibly there is a profit motive and personal use exceeded the greater of 14 days or 10% of the rental days, allocation is required.

[skhyatt]

Wouldn't it be simply referring to 280A(a) AND 280A(d)(2)(C) ??

[skhyatt]

Solomon, in TTB, 7-7 under the section, "Did you know?" It says if considered personal use, then no expenses are deductible, but income must be reported. Isn't that talking about only the period during the year where use is considered personal? That's the way I read Sec 280A(d)(2). I'm trying to reconcile this section with the section above on that same page, "Allocating expenses:Personal vs Rental"