Father buys houses and rents to kids

[JenMO]

Father has several rentals and kids have no place to live. Rents one to son, one to daughter and kids. They pay some rent, or so he reports, but not the same as his other houses, and not just 20% less. Do I have to report the little rent he gets with no deductions? Can I report rent and expenses to get to 0? What about rent and depreciation? Nothing like a mess the last week.

[Bees Knees]

Vacation rules apply

TTB page 7-7 says:

Mixed use property. If personal use of the dwelling is more than
the greater of 14 days or 10% of the days the unit is rented at fair
rental value, the deduction for expenses is limited to rental income
[IRC §280A(c)(5)]. Therefore, a loss cannot be reported on the tax
return. Expenses that are limited by this provision are carried over
to future years. Exceptions: Certain expenses are allowed in full for
mixed-use property, including:

1) Rental portion of deductible home mortgage interest,
2) Rental portion of real estate taxes,
3) Rental portion of deductible casualty and theft losses, and
4) Direct rental expenses such as rental agency fees, advertising,
office supplies, and other expenses that are related only to the
rental activity.

Where to report loss. If expenses that are allowed in full create
a loss on mixed-use property, report the loss on Schedule E of
Form 1040.

Personal use. Use of a dwelling unit by the taxpayer, family member,
or any person who has an interest in the property is considered
personal use for purposes of allocating expenses. An exception
exists if a family member uses the dwelling as their main home
and fair rental value is paid. Days spent working substantially full
time on repairs or maintenance do not count as personal days.

Did You Know? Use of a dwelling unit by any individual who pays less
than fair rental value is considered personal use by the owner; therefore
no expenses attributable to that period rental are deductible. Rental
income must nevertheless be reported as income. [IRC §280A(d)(2)]

Court Case: Married taxpayers rented a home to parents in 1990, 1991
and 1992. The appraised rental value of the home was $7,200 per year.
Although the taxpayers reported rental income of $8,400 or more each
year, the Tax Court determined that the renters had actually paid only
$6,000 in rent each year. The court lowered rental income to $6,000
per year. Because that amount was less than fair rental value, all days
were considered personal use by the taxpayers. Rental expenses for
all three years were therefore disallowed, with the exception of interest
and taxes that were transferred to Schedule A. [Jackson, U.S. Tax
Court, July 9, 1999]

Court Case: In a similar case to Jackson, above, rent that was 20% less
than the appraised value was considered fair rental value because the
tenants, parents of the taxpayer, were expected to take unusually good
care of the property and the taxpayers were able to avoid incurring
management fees. [Bindseil, U.S. Tax Court, July 18, 1983]

Bottom line is looks like you have to report income on Schedule E and cannot deduct any expenses, other than mortgage interest and real estate taxes on Schedule A. I would advise the client that the kids need to pay rent that is at least 20% less than FMV rent, and say the reduced rent is because they are expected to take care of the property better than an average renter. Otherwise, no deductions are allowed on Schedule E to offset income.

[JenMO]

Thanks, that's really what I thought, just hoping there was something I missed. Almost better off not to charge rent at all. Could kids just pay ins and taxes, or would that be considered rent? They are paying considerable less than 20% than the rest of his rentals. Like most parents- still taking care of the kids.

[AZ-Tax]

Question along same line....

Father owns the rental, the tenant is unrelated to the Father and the Daughter manages the property for the Father. Can the Father treat the management fee expenses in the same manner as if the property manager was unrelated to the Father?

[Burke]

I don't see why not, as long as the mgmt expenses are reasonable, and he 1099's them to the daughter, and she reports them on her tax return, subject to SE, etc. etc.

[ED SMITH]

If it is rented more than 20% below the Fair Market REntal for the area, it is a Not-For-Profit rental - Line 21, Other Income. Expenses are taken on Sch A, 2% Miscellaneous.