Discussion:Family use of rental property
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Discussion Forum Index --> Basic Tax Questions --> Family use of rental property
Discussion Forum Index --> Tax Questions --> Family use of rental property
Actionbsns (talk|edits) said: | 16 May 2008 |
| Client bought a home a few years ago in another state for the use of his daughter and her family. They pay a lower than FMV rent and it is their year round home. The first year they did this, the CPA, who I was working for at the time, took the mortgage interest and property tax deduction on Schedule A, and that is all, notes indicate that since it was rented to a family member that was all that was required. I have followed that lead since I took over the client. But as time goes by and I've learned/read more about situations like this, I'm just checking myself to be sure this is the correct treatment. My searches here don't bring up discussions I know exist, so I'm starting this one. Feel free to redirect me to an existing discussion. I've printed Publication 527 and it confirms that a family member renting at less than FMV is categorized as personal use, but does that mean nothing is reported as income and expenses? I'm a little confused now on whether I need to change what I've done in the past. | |
| 17 May 2008 | |
| You are correct - below FMR is considered personal use. Income should be reported on Line 21 and interest and taxes on Sch A - no more expenses. | |
| 19 May 2008 | |
| Hi you are both wrong. Sec. 280A(d)(3) treats rentals to family members as non vacation property if the rental is at FMV for a principal residence. In most cases the courts have held a slightly below FMV to a family member maybe allowed because the family will maintain the property better and the chances are slight the property will be wrecked. Under this circumstance it is a rental property like any other arms length rental property. If the property doestn pass that muster the home is treated as a vacation property on Sch E and expenses are deductible under the vacation home rules, not line 21 and sch A. bye | |
| 19 May 2008 | |
| The question with family members at less than FMV is does the acceptance of money constitute rent for income recognition purpose? | |
Actionbsns (talk|edits) said: | 19 May 2008 |
| Thanks Dennis, the question is most definitely regarding the rental income. I was hoping for a citation to back up the original accountant's decision not to include the rental income on the tax return. Now I think I need to amend the last few years returns to recognize that income. | |
Death&Taxes (talk|edits) said: | 19 May 2008 |
| Dennis raises a great point. Is there a lease? Is the payment a regular amount? From personal knowledge I know that in absence of a lease or formal agreement, it is nearly impossilbe to evict family. In our case, it was only the fact that this same family stopped paying the lot rent that resulted in their eviction by that party, where a formal lease did exist. | |
Actionbsns (talk|edits) said: | 19 May 2008 |
| Now I need a little help in my approach to the client. I need to amend the last few years returns and it will probably result in about $2000 or so more in taxes plus penalties. I've always paid penalties whent I make a mistake. When I explain this to the client, do I insist that they amend, suggest that they amend, or just prepare the amendments? I think my explanation needs to be in writing with my offer to pay the penalties (anyone have an idea on the ballpark of penalties over the last three years?)and telling them the returns should be amended. | |
| 19 May 2008 | |
| Why would you pay the penalties if you did not make a mistake? You can prepare the amended returns, but it is up to the client to file them. You can't force them to amend. However, if they don't you can decide if you want them to remain your client. | |
Actionbsns (talk|edits) said: | 19 May 2008 |
| Joan, I've been doing this return for several years now and I think I should have researched this issue earlier. If it weren't for TA, I'd probably not have realized something needed changing. The prior CPA is quite knowlegeable which is why I was hoping for a citation to back her up and there simply isn't one. I think that's my bad.
Solomon, what is Banana ball Wes? Thanks for the link to Jackson, or should I say "RATS!!!" Sure did like that Gift idea though, but with the more likely than not rules. . . . pretty sure that's a NOT. | |
| 19 May 2008 | |
| Actionbsns - That was a response to the post by WesR. He is a golfer and a banana ball in golf is a poor shot. However, I would agree with him perhaps if the facts justified a small below FMR. Nevertheless, the Jackson case was ostensibly too far below FMR. | |
Death&Taxes (talk|edits) said: | 19 May 2008 |
| What is fascinating about Jackson is that Jackson reported $7,200 as rental income, based on IRS advice he claimed. The court found $8,400 to be FMR, but apparently the tenants, Jackon's parents, said they only paid $6,000. The court accepted the $6,000, giving Jackson a small break from the disallowance of rental expenses by lowering the rent. | |
| 19 May 2008 | |
| I would call it bad representation. Court let the service have its cake and eat it. Rental at less than FMV because they were paid less than they reported so(d)(3) doesn't apply? But the income counts because they called it rent.♫ | |
| 20 May 2008 | |
| Hi will take another lesson :) although I do remember some leeway with some below market rents were allowed. But thanks for the case have printed out and will review. bye | |
| 20 May 2008 | |
| Hi just so you know I am not blowing smoke all of the time, I did read Jackson and pursued my FMV determination of some leeway. Bindseil, Lee (1983) TC Memo 1983-411 . On the basis of testimony of IRS's expert during cross-examination the FRV of a house rented by taxpayer to his parents, as determined by the expert using comparables, was discounted by 20% to reflect savings to the taxpayer by avoiding a management fee and by renting to trustworthy tenants. This might seem a stretch but I knew I had seen or heard something in the past. bye | |
| 20 May 2008 | |
| I knew about that one Wes, that is why I said depending on facts etc. I would agree with you. However, that is the only one I could find and it seems most other cases favored (d)(2) on personal use when below FMR. | |
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