renting upstairs to cousin

[Possi]

So, 2 brothers bought grandma's house for $200k.

Grandma's stuff is still in the house, all "downstairs." They are renting upstairs to a cousin for $400/month. They intend to clean the place out, clean it up, and use it as full-rental property within a year. They didn't want it vacant, so cuz moved in.

Not sure how to depreciate upstairs, especially knowing this will change for 2018.

Any suggestions?

[Lion EA]

Is cuz paying fair market rent?

[Possi]

4 minutes ago, Lion EA said:

Is cuz paying fair market rent?

Cuz is paying $400 and the client GUESSES FMV is $800. I doubt FMV is that much, but I'll use it. He sent some comps and the comps are dumps.

[Lion EA]

Then, personal use rental, below FMR to a relative.  Haven't done one of those for a long time.  I don't think you depreciate....

[Abby Normal]

A discount to a good tenant who won't trash the place can be allowed.

True below market rent to a related party is simple personal use. Line 21 income, no expenses.

[Possi]

Thanks, y'all!

 

[Pacun]

Your cousin is NOT a related party. Your cousin is nothing more than your friend.

[jklcpa]

33 minutes ago, Pacun said:

Your cousin is NOT a related party. Your cousin is nothing more than your friend.

 

^ this.   Sec 280A defines "family" by referring back to sec 267(c)(4) that reads as follows  -

 

Quote

The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants

 

[Pacun]

I guess I was wrong.

Now another question, I have a house that I rented for 27.5 to a good family that took good care of it and now my house has been depreciated (let's say) almost completely.  The area where the house is has become the place where every body wants to live and rent is really expensive. Let's say rent is $10K per month and my cousin rents it from me for 9K which is under FMV. So I just pocket those $118K from rent since it is personal use?

 

[Lion EA]

I'd suggest a 10% discount to a good tenant would NOT make it personal use, still close enough to FMR for me, but I don't have any clients with rentals right now so haven't researched that lately.  However, IF it were personal use, you report income, gross income, on Line 21 and take NO deductions, I think.  Maybe deductions on Sch A, but I think not.  So, you haven't pocketed anything, less than if it were an arms-length rental on Sch E where you can deduct expenses and depreciation.  I'm glad to hear that a cousin doesn't muddy the waters.  Long ago I had a client who let his daughter live in his second home really cheap, so had to research at that time.  He was not happy with the outcome!  He was expecting to deduct his foregone rent or something like that.

[jklcpa]

3 hours ago, Pacun said:

I guess I was wrong.

Pacun, no, you were correct!  A relative isn't necessarily a related party under the tax law that I cited.  A cousin would NOT be a related party under the rules of 280A.   Along with cousins, these people are also excluded from the related party definition: stepparents, uncles, in-laws, cousins, nephews and ex-spouses. 

[Gail in Virginia]

7 hours ago, jklcpa said:

Pacun, no, you were correct!  A relative isn't necessarily a related party under the tax law that I cited.  A cousin would NOT be a related party under the rules of 280A.   Along with cousins, these people are also excluded from the related party definition: stepparents, uncles, in-laws, cousins, nephews and ex-spouses. 

No aunts?  I guess this isn't a picnic.

[Pacun]

Now I can see I was correct. I have always said that my cousin is my friend when it comes to tax law.

[Pacun]

18 hours ago, Lion EA said:

I'd suggest a 10% discount to a good tenant would NOT make it personal use, still close enough to FMR for me, but I don't have any clients with rentals right now so haven't researched that lately.  However, IF it were personal use, you report income, gross income, on Line 21 and take NO deductions, I think.  Maybe deductions on Sch A, but I think not.  So, you haven't pocketed anything, less than if it were an arms-length rental on Sch E where you can deduct expenses and depreciation.  I'm glad to hear that a cousin doesn't muddy the waters.  Long ago I had a client who let his daughter live in his second home really cheap, so had to research at that time.  He was not happy with the outcome!  He was expecting to deduct his foregone rent or something like that.

I would have done a gift return in the case of the daughter getting almost free rent.

[Lion EA]

Well, that client (now ex-client) was a wheeler-dealer and wouldn't pay for a gift tax return, so he got what he got.  When I went out on my own, I did not let him know where I was.  Avoided future problems with him, complaints from him.

[Max W]

Even if it is an unrelated party and the rental shows a loss for 3 out of 5 consecutive years, it could be classified as a not-for-profit rental.  

From Pub 527

Presumption of profit. If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

[Abby Normal]

16 minutes ago, Max W said:

Presumption of profit. If your rental income is more than your rental expenses for at least 3 years out of a period of 5

I would add back depreciation before making that calculation. Positive cash flow would cut it. Also, knowing the property would increase in value, supports an ultimate profit motive.

[Max W]

I agree.  

[Catherine]

If there is ANY history whatsoever of prior tenants that trashed the place, that also supports giving a GOOD tenant a discount.  A good long-term tenant who treats your property well is worth a LOT of money to any landlord.  And extra couple thousand a year is nothing if a jerk does $10K of damage.