Leasing Space to Non Profit

[equinecpa]

I have a client who runs a non profit wildlife preserve (501c3) out of his ranch. He charges the non-profit a nominal rent of $12,000 each year (rent is not FMV). Note: He is a director and the president of this non-profit entity. He has a signed lease leasing it to the 501(c)(3).

I'm preparing his tax return and am reporting the $12,000 as rental income.This does not come close to covering the operating expenses of the facility. I'm trying to figure out what to claim as far as expenses go?

Do I depreciate buildings or not? Just his maintenance comes to more than $12,000 a year.

Would you claim the expenses and then restrict the losses?

Would perhaps the difference between FMV rent and actual rent charged be a charitable contribution, with FMV rent being reported on Schedule E ( I'm hoping this is not the case as 1) how does one determine the FMV rent of a wildlife preserve, and 2) He may end up being restricted on his charitable contributions because of his income level).

Thanks for your help!

Carolyn

[Bees Knees]

Two issues for you to consider...

TTB, page 4-15:

Contributions Not Deductible as Itemized Deductions
• ...
• The value of the taxpayer’s time or services.
Example: Kathy owns a condo in Florida that she rents to tourists on a
short term basis. She donates two weeks use of the condo to a charity.
The amount of rent she could have received had she rented the condo
to a paying customer during the same period is not deductible as a
charitable contribution.

TTB, page 7-8:

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]

[equinecpa]

That sucks!

So does that mean if a lessor leases office space to a Non-Profit organization at a discount, they can't deduct any expenses related to that space? That hardly seems right...and I can vouch that I've never asked any of my commercial building clients if they lease anything to non profits at less than FMV.

[gkaiseril]

Your client would get expenses up to the rent collected. The balance is personal expense. No income no loss.