Fair Rental Value

[Terry D EA]

 One of my clients has determined that the property they are renting to their daughter maybe under FRV for the area. From their research it appears they maybe 300 to 400 under FRV. Wouldn't the fair rental value be an average? I know the IRS says if the rent received for the property is not equal to fair rental value, then it is personal use property. I am leaning toward personal use property. If so, then the rent received is all income without any deductions. Correct?

[DANRVAN]

If rent is below FMV, report on line 21 of 1040. 

Deduct mortgage, mortgage insurance, and property tax on Schedule A.

[Terry D EA]

Got that, thank you!

[Richcpaman]

Terry:

The property can be carried on Sch E, it just has to be rented at FMV, or within 80% of FMV, which the IRS has allowed as a reasonable discount for a family member in a rental home.   If the loss is limited to the property owner, then you can go with the Line 21, Sch A method.

Rich

 

[michaelmars]

300-400 under FMV out of what? Out of $800 or out of $5000 per month.   [yes I deal with NYC rents].    A lower FMV can be justified since the daughter will be taking care of it better, perhaps overseeing other rentals in the building, taking care of repairs etc.   Heck, tell him to charge her $200 more and he gets his deductions, but remember her on her birthday with a bigger gift. 

[DANRVAN]

5 hours ago, Richcpaman said:

 

The property can be carried on Sch E, it just has to be rented at FMV, or within 80% of FMV, which the IRS has allowed as a reasonable discount for a family member

 

Rich, are you referring to Bindseil vs c, TC Memo 198-411?  I am not sure how much authority that case would hold since Bindseil lost. (He argued the case himself). 

From his cross examination of the IRS expert witness came the conclusion by the judge that a 20% discount was reasonable for tenants who would take "unusually good care of the property" and the fact he would save by no paying a management fee.

Unfortunately, Bindseil had rented to his parents for a 30% discount and lost the case.

Back to Terry's post, I am not aware of any 80% general rule by the IRS, but you might have a case if your situation is similar and rent within 80% fmv. A key fact in the Bindseil case was that the tenant parents spent over $2,000 in repairs. How much work will your client's daughter be doing?

Bindseil also lost the related issue "whether in renting the house to his parents petitioner was engaged in an activity for profit within the intendment of section 183."

I believe that requires him to report on line 21 of 1040 as instructed in chapter 4 of IRS pub 517.

 

[Terry D EA]

5 hours ago, michaelmars said:

300-400 under FMV out of what? Out of $800 or out of $5000 per month.   [yes I deal with NYC rents].    A lower FMV can be justified since the daughter will be taking care of it better, perhaps overseeing other rentals in the building, taking care of repairs etc.   Heck, tell him to charge her $200 more and he gets his deductions, but remember her on her birthday with a bigger gift. 

I am not sure out of what. Is it not the client's responsibility to determine the fair rental value? I have asked them to get me the average in their area. With that said, I want to look at the 20% issue and the fact it is rented to a family member. If I back into their figures, the daughter is paying 765.00 per mo. and if the FRV is 300.00 per month higher, then the rent is more than 20% discounted and the income should be reported on line 21. Maybe if I contact a realtor in the area they can give me the average FRV.

[RitaB]

18 minutes ago, Terry D said:

I am not sure out of what. Is it not the client's responsibility to determine the fair rental value? I have asked them to get me the average in their area. With that said, I want to look at the 20% issue and the fact it is rented to a family member. If I back into their figures, the daughter is paying 765.00 per mo. and if the FRV is 300.00 per month higher, then the rent is more than 20% discounted and the income should be reported on line 21. Maybe if I contact a realtor in the area they can give me the average FRV.

Yes, it is the client's responsibility.  Yes, realtors are a good source.  FRV varies so widely by region.  My client who just came in charges $700 a month for a 1500 square foot home.  I know him and he's getting the maximum he can, if you know what I mean.  I was thinking about that thread were a suggestions was 1% of square footage per month.  That would never work here. 

I did find this that might help a little: https://www.huduser.gov/portal/datasets/fmr/fmr_il_history.html

[Terry D EA]

Thanks Rita! Where on earth did you find this?

[RitaB]

13 minutes ago, Terry D said:

Thanks Rita! Where on earth did you find this?

You're welcome, my friend!  Google search:  "Fair rental value by state."

[easytax]

3 hours ago, Terry D said:

I am not sure out of what. Is it not the client's responsibility to determine the fair rental value?  Maybe if I contact a realtor in the area they can give me the average FRV.

Take a look at Zillow.com and see what comes up for your area.   I use this to find current rental and property sales values. If  your area is covered, it may be a quick, accurate way.

 

[TAXMAN]

I have used the one Rita indicated for several years. In my area there may be even an overstated price. But when renting to relatives I always ask what would you rent it to me for. Than why is your rent this low? I have a landlord who has not raised his rents in 5 years because as he says. They are always on time, don't complain and even fix stuff. To them it is their home. Take care of it.

[michaelmars]

you really can't use Zillow or that sort of thing, every house is different, alum siding, pool, central air, updated bathrooms, new vs old roof or hvac.  An appraiser can adjust for that and are experienced at doing prior years.

[kcjenkins]

Zillow or Trulia is not reliable as an 'authoritative source', but is still useful as a tool to tell you whether the client's number is 'in the ballpark', or needs to be backed up with a written appraisal by a realtor.  IMHO it's a starting place,  altho they are more accurate in the in-town locations and much less in rural areas.  Because of the higher number of comparables and more neighborhood info, I think.