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Related Party Rental

Technical topics regarding tax preparation.
#1
HWCPA  
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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!
 

#2
Nilodop  
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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.
 

#3
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Income on line 8 of Schedule 1. No deductions. No Schedule E. Do not pass "go" etc etc ...
Because on T.A. ten was the most you were allowed
 

#4
Nilodop  
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#5
HWCPA  
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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?
 

#6
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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.
 

#7
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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.
 

#8
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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?
 

#9
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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.
Because on T.A. ten was the most you were allowed
 

#10
RightOn  
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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?
 


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