Technical topics regarding tax preparation.
Related Party Rental
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22-May-2020 1:52pm

Client rents a small apartment to a child for much less than FMV. I understand that below FMV rent creates a Personal Use Days situation so none of the days are Fair Rental Days and expenses can't be deducted.....the client doesn't itemize either so no mortgage interest or real estate taxes are used.

However from my research the rental income should/needs to be claimed. Crappy situation when many of these situations are just cost sharing arrangements with no profit motive whatsoever.

Any other research that would prevent claiming income (with no expenses) under a cost sharing arrangement?

Thanks for any help!

22-May-2020 2:23pm

Any other research that would prevent claiming income (with no expenses) under a cost sharing arrangement?. Hard to say w/o knowing what research you have.

22-May-2020 6:45pm

Income on line 8 of Schedule 1. No deductions. No Schedule E. Do not pass "go" etc etc ...

22-May-2020 7:33pm

viewtopic.php?f=8&t=17130&p=150707&hilit=cost+sharing#p150707

26-May-2020 10:07am

Ok, as Tenletters stated it's income on Line 8 with no expenses. It's what I figured unfortunately.

I guess to escape these sort of tax traps it's best that clients not charge their children actual monthly rents and just have them pay some of the expenses arbitrarily (real estate tax bill, some heating or electric bills, etc.). Otherwise these "rents" which are just cost sharing arrangments are just a lose-lose for the client tax wise with income and no deductions.
About right?

26-May-2020 12:59pm

I disagree. If the apartment was rented at less than FMV by child, those rental days would be considered personal use days of the client. This would be considered client's vacation home under 280A and rental deductions would be limited to income.
(I am assuming the condo was rented for more than 14 days.)

Rental income and expenses from vacation homes are reported on Schedule E.
Last edited by Seaside CPA on 26-May-2020 1:56pm, edited 1 time in total.

26-May-2020 1:26pm

Seaside CPA wrote:I disagree. If the condo was rented at less than FMV by child, those rental days would be considered personal use days of the client. This would be considered client's vacation home under 280A and rental deductions would be limited to income.
(I am assuming the condo was rented for more than 14 days.)


How would you interpret Sec 183 in the context of a substantially discounted rental?

I think there's a line in there somewhere. Even if it's fuzzy. If it's closer to a rental arrangement, it's probably a rental. If it's something more like roommates sharing a rented house, it's possibly a cost-sharing arrangement, and I wouldn't report income to the (responsible) soul who merely collects and remits the money.

26-May-2020 1:59pm

I guess we need more info. I took OP to mean an entire apartment is rented to the child. Later, there is a question regarding cost sharing arrangement. Do child and client live together in the same apartment? The same building?

OP, can you clarify the situation?

26-May-2020 3:44pm

Seaside, not for profit rentals are not reported on Schedule E (read the instructions) although an alarming number of preparers who should know better do make that mistake. And below market rent to a related party is the proverbial poster child for what a not for profit rental would be.

If I was feeling fiesty and aggressive I could try to make the case that the rents were merely gifts from a grateful relative or that the relative was really just house sitting for the owner and making some token contributions to the upkeep of the place as a sort of favor. But that is probably more aggressive than I would actually be on a return that I was going to sign.

28-May-2020 5:30pm

I remember I have read before that there is a distinction between "Not for profit rental" and "Below market rate rental". What are the rules to differentiate between the two? And is there any difference in the tax consequences?

14-Jun-2022 11:27am

This situation has of course reared its ugly head again. In lieu of a monthly charge for rent could there be a situation where the family member just lives there rent free and say, pays the real estate tax bill or some utility bills or a combination thereof through a gift during the year? Nothing in writing nor enforceable of course but just good ole "hey you can live here and if you throw me some money for bills that's fine"?

Also, could fair market value be paid and reported on a tax return with the expenses taken on Schedule E and then if the landlord decides, they could gift some money back to the renter at their own discretion. No harm in that is there?

16-Jun-2022 6:25am

Yes and yes.

16-Jun-2022 8:04am

HWCPA wrote:Also, could fair market value be paid and reported on a tax return with the expenses taken on Schedule E and then if the landlord decides, they could gift some money back to the renter at their own discretion. No harm in that is there?

There's different ways to handle that, not all equal in believability.
1. Write a check for $12,000 and make a gift at the end of the year, or a $60,000 check every 5 years.
2. Write a check for $1,000 each month.
3. Accept a rent payment for $1,000 less than the agreed FRV rent and make a notation in the file for "gift".
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