Rental Income of Personal Residence clarification

Technical topics regarding tax preparation.
#1
HWCPA  
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Client rents at below FMV (only about $4,000 per year) a second residence he owns to his girlfriend's daughter. These situations seem to be happening more and more. Based on research just wanted to clarify that the $4,000 of income gets reported but any expenses go on Schedule A according to the following:

1. For purposes of determining whether a taxpayer uses a dwelling unit as a residence or home during the tax year (see ¶86,110.30), the number of days the taxpayer used it for personal purposes must be determined. A taxpayer is deemed to use a dwelling unit for personal purposes for a day if, for any part of that day, the dwelling unit is used:

(1) for personal purposes by the taxpayer or another person who has an interest in the dwelling unit;

(2) for personal purposes by any family member of the taxpayer or another person who has an interest in the dwelling unit;

(3) by any individual who uses the dwelling unit under an arrangement that enables the taxpayer to use some other dwelling unit for any period of time (whether or not a rental is charged for the use of such dwelling unit);

(4) by any individual to whom the dwelling unit is not rented for a fair rental price (other than an employee who uses the dwelling unit for the convenience of his employer under Code Sec. 119) (Code Sec. 280A(d)(2); Prop. Reg. Sec. 1.280A-1(e)(1)).


So under item #4 my client would be treated as using the home for personal purposes for 365 days since it was always rented for less than FMV. Therefore expenses would be limited to Schedule A.

2. Then, regarding the 15 day rule:

"A special rule applies to the treatment of rental income and rental expenses when a dwelling unit used as a personal residence by a taxpayer during the tax year is actually rented for less than 15 days during that year. In such a case, the taxpayer does not include the rental income in gross income and the taxpayer is not allowed any deductions that would otherwise be allowed because of the rental use (Code Sec. 280A(g); Prop. Reg. Sec. 1.280A-3(b)).

It is not necessary that a dwelling unit be rented at fair rental value for it to be "actually rented" for this purpose. Thus, the special rule does not apply if a dwelling unit that is used as a personal residence by a taxpayer during the tax year is actually rented for 15 or more days during that year, even if the value the taxpayer receives is less than the fair rental value of the dwelling unit (Roy v. Comm'r, T.C. Memo. 1998-125).


In this case, even though my client is treated as using the residence fully for personal purposes it is still considered rented even though it was below FMV.

So it appears that the income gets reported on Line 21 as Other Income because it's still considered "rented" but expenses only go on Schedule A because of the personal use. Is this the correct treatment?
 

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