Rental Property

  • Thread starter Chris Ruehrwein
  • Start date

C

Chris Ruehrwein

Are the tax consequences different if you are renting a house to immediate
family members(sons) or any John Doe? If I charge less from my sons is there
a difference ih how I account for the income?
 
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A

Arthur Kamlet

Are the tax consequences different if you are renting a house to immediate
family members(sons) or any John Doe? If I charge less from my sons is there
a difference ih how I account for the income?

Only if you charge less than Fair Market Rental.


If you chage less than FMR to a stranger, because you really
are desparate for income and not willing to leave it go unrented
while someone meets your rent, that can usually be sold, and you
still have a schedule E rental property.

But if you charge less than FM to a related party, you are no
longer entitled to use Schedule E netting of income and expenses.

Rather, income goes to 1040 line 21. Expenses, but not
more than income, goes to schedule A as a 2% Misc Deduction.
 
D

D. Stussy

Arthur Kamlet said:
Only if you charge less than Fair Market Rental.

If you chage less than FMR to a stranger, because you really
are desparate for income and not willing to leave it go unrented
while someone meets your rent, that can usually be sold, and you
still have a schedule E rental property.

But if you charge less than FM to a related party, you are no
longer entitled to use Schedule E netting of income and expenses.
Not universally true. Schedule E treatment is still available as long as
there's no loss.
 
S

Seth

Arthur Kamlet said:
If you chage less than FMR to a stranger, because you really
are desparate for income and not willing to leave it go unrented
while someone meets your rent,
Then isn't the amount you're charging FMR by definition?

Seth
 
S

sfcnm-mtm

Not universally true.  Schedule E treatment is still available as long as
there's no loss.


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I have to agree with Dean. The mere fact that one is willing to accept
rental payments from a family member that are less than what one would
accept from an unrelated party does not mean you are not renting for a
profit. As long as there is a profit, one can use Schedule E. Renting
to a family member at a price that is less than what one could get on
the open market can easily be justified by the advantages that accrue
from having someone you know in the house. The family member will take
better care of the home. The family member is willing to make routine
repairs. The family member will always pay and on time. etc. etc.
 
S

sfcnm-mtm

I'm not sure if an IRS agent would accept those reasons after "can
easily be justified ..." above.  For example, if the family member
makes $2000 of repairs a year, but the owner reduces the rent by
$2000, then the owner might as well have charge full price rent and
done the $2000 repairs themselves and deducted it on Schedule E.
The point I was making is that FMR is not a black & white number. FMR
is a function of all the facts and circumstances surrounding the
rental agreement. Some of those facts can be quantified in dollars and
cents and some of them can not. I firmly believe that the IRS will not
question the amount of rental income on a family rental that shows a
profit on the Schedule E.
 
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A

AES

The point I was making is that FMR is not a black & white number.
Speaking of FMRs or FMVs:

Owners' association of a local "gated resort community" where I have a
house actually owns all the land, including building lots under the
houses, and gives long-term leases on each lot to individual owners.
When an owner moves out and sells their house, the assoc normally writes
a new lease to there new owners.

There is, however, fine print in all the leases which says that if the
assoc wants or needs to acquire a particular lot for assoc purposes
(e.g., some recreation facility), it has a "right of first refusal" at
the time the owner moves out and puts the house on the market, to
purchase the house at an appraised* price -- **and it choses the
appraiser**.

At the minute the assoc is exerting this right wrt a departing owner
(actually, wrt to his estate, since he departed to the big resort
community in the sky); their appraisal/offer is several hundred K under
a firm purchase offer made by an outside buyer; and they're playing
hardball on the matter.

Leaving aside the interesting legal battle that now appears imminent, if
the assoc wins on this one, will the owner or his estate have any kind
of deductible casualty loss or equivalent on the "lost income"?
 
M

Mark Bole

Arthur said:
Only if willing parties on each side acting without duress.



Since duress has entered the picture, I'd say No.

I don't think that includes "market duress". For example, if you
realize that each month a property goes unrented means more negative
cash flow, and that by lowering your rent, you become more competitive
compared to your fellow landlords, I think your decision to lower the
asking rent would be considered "FMV" -- otherwise, how would FMV rents
ever go up and down?

-Mark Bole
 
B

Bob Sandler

Leaving aside the interesting legal battle that now appears imminent, if
the assoc wins on this one, will the owner or his estate have any kind
of deductible casualty loss or equivalent on the "lost income"?
This is the same as the recurring question: "I did some work
for X and they never paid me. Can I deduct the amount of pay
that I lost?"

You can't take a deduction for income you never received. By
selling at a lower price, the estate will pay less tax
because it will have a lower profit, or a bigger loss, on
the sale. It does not pay any tax on the income it did not
receive. The "lost income" is effectively "deducted" because
it is never reported as income in the first place. But there
is no direct deduction that would show up on a tax return.

Bob Sandler
 
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Seth

This is the same as the recurring question: "I did some work
for X and they never paid me. Can I deduct the amount of pay
that I lost?"

You can't take a deduction for income you never received. By
selling at a lower price, the estate will pay less tax
because it will have a lower profit, or a bigger loss, on
the sale. It does not pay any tax on the income it did not
receive. The "lost income" is effectively "deducted" because
it is never reported as income in the first place. But there
is no direct deduction that would show up on a tax return.
If the appraisal for tax purposes is (say) $700,000, and the
association gets to claim it for (say) $500,000, then there's a
$200,000 capital loss to the estate.

Seth
 

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