Fair Market Value Rent to Relative


W

wallace_cpa

Okay, I've read some of the threads on this topic and there
are so many positions, it's hard to separate them all. I've
got someone renting a second home to their son at below
market value. This is the son's primary residence. Here
are my conclusions:

1) Vacation property rules indicate this situation requires
that the use is deemed personal use and no rental income or
expenses can be claimed on Sch E.

2) Nothing precludes the owner from claiming the interest
and taxes on Schedule A. And,

3) The rent that is received must be claimed as other
income.

Some of the threads I read (one from an ex IRS agent) says
this should be netted out on Sch E, but brought down to zero
with no loss allowed following the "Not for profit" rental
rules. Where should this be claimed then?

What about depreciation. If this property is later sold,
even thought no business deductions are allowed, is the
basis of the property reduced for allowed or allowable
depreciation. I would have to say no, but just thought I'd
check.
 
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H

Harlan Lunsford

Okay, I've read some of the threads on this topic and there
are so many positions, it's hard to separate them all. I've
got someone renting a second home to their son at below
market value. This is the son's primary residence. Here
are my conclusions:

1) Vacation property rules indicate this situation requires
that the use is deemed personal use and no rental income or
expenses can be claimed on Sch E.
Personal use it certainly is.
2) Nothing precludes the owner from claiming the interest
and taxes on Schedule A.
Except for the fact that house (not a home) is NOT
taxpayer's residence, either primary or secondary. Taxes
yes, (provided they pay same); mortgage interest, no.
And,
3) The rent that is received must be claimed as other
income.
Don't see it that way. Sounds like they and son are merely
sharing expenses. Just don't structure it as rental
property.
Some of the threads I read (one from an ex IRS agent) says
this should be netted out on Sch E, but brought down to zero
with no loss allowed following the "Not for profit" rental
rules. Where should this be claimed then?

What about depreciation. If this property is later sold,
even thought no business deductions are allowed, is the
basis of the property reduced for allowed or allowable
depreciation. I would have to say no, but just thought I'd
check.
And therefore, since it's not rental property, no
depreciation implications.

I've seen some cases from both CPA's and a certain
nationally known tax prep firm which were "agressive". In
one, clients were renting neighboring house to his mother
who paid 100$ per month "rent", while taking interest
deductions for $6000 plus depreciation, etc etc, for a net
rental loss of about 7600$.

You didn't say how old son is, but.. perhaps... is he still
a dependent in college? (grin

ChEAr$,
Harlan Lunsford, EA n LA
 

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