Rental below FMV

[taxdan]

If a client rents a house all year at below FMV to a non family member (old family friend), does the client not report the income and take any interest or prop taxes on sch A? I assumed the client reported the income on sch E along with any expenses UP TO the income...no loss...

...but the instructions for sch E say that renting to anyone for less than FMV is personal use and if personal use is more than 14 days...and you "rented" it for less than 15 days...do not report income and do not take expenses.

It's late and I'm confused. Someone take me home.

Thanks for any input!

[RoyDaleOne]

Unless it is way below FMV just put everything on the Schedule E. There are a number of reasons why renting some below FMV is still renting for profit. for example: "The fair rental value of a home can be discounted for renting to trustworthy tenants and to avoid paying a management fee."

[lbbwest]

If a client rents a house all year at below FMV to a non family member (old family friend), does the client not report the income and take any interest or prop taxes on sch A? I assumed the client reported the income on sch E along with any expenses UP TO the income...no loss...

...but the instructions for sch E say that renting to anyone for less than FMV is personal use and if personal use is more than 14 days...and you "rented" it for less than 15 days...do not report income and do not take expenses.

It's late and I'm confused. Someone take me home.

Thanks for any input!

What is the MOTIVE for renting to the old family friend? IF the property remained vacant for a long period of time at $1,000 a month and you are renting to OFF (old family friend) for $750 perhaps FMV IS 750. Look at the facts and circumstances BEFORE you choose A or E, not after. IF FMV is $1,000 per month and you rent to OFF for $500 because he just got divorced and that's all he can afford is an entirely different scenario. Form follow function, not the other way around. lbb

[taxdan]

Thank you both very much for the input. I will ask some more questions of the client and then make my decision. Thanks again!

[OldJack]

Its not my job to decide or determine if a client is renting below fair market value.

[RoyDaleOne]

I semi-disagree. It is your job to ask, because, you are the preparer and where the income and deductions are reported depends on the answer to that question.

So, I agree it is not your responsibility to determine fair rental value, however, you need to ask the question, otherwise, how do you know where to place the items?

An assumption either way, on your part, is answering the question for your client.

[kcjenkins]

Of course, you would not know it was below FMV unless the client told you so, since FMV can vary so much depending on the condition of the property as well as the location. But even if a client says "I'm renting it to XXX for less than normal" you have to ask him some questions to determine if that difference is reasonable, or is actually a true 'below FMV'. For example, if you were renting a normal $600 month house to someone you trust for $550, that would not disqualify it for deductions. Or if you rented the same house to a skilled carpenter for $300 a month, but he's going to do significant work on the house for you in exchange for the lower rent, that would not disqualify it. Although you would in that case recognize income for the work received, but then deduct the repairs as an expense. The TC has allowed up to a 20% discount as reasonable for renting to a family member, on the logic that they will treat the property better, maintaining the value, for example. So I agree that we have to ask questions before we make decisions in such a case.

[OldJack]

It is the clients tax return and the clients job to provide me with proper tax information. It is the IRS's job to audit that tax return. It is my job to prepare the tax return in accordance with the rules and regulations. Its not my job to ask, decide, or determine if a client is renting below fair market value.

[lbbwest]

It is the clients tax return and the clients job to provide me with proper tax information. It is the IRS's job to audit that tax return. It is my job to prepare the tax return in accordance with the rules and regulations. Its not my job to ask, decide, or determine if a client is renting below fair market value.

OldJack, I do believe you are wise beyond your advanced age, but I disagree with you on this one; perhaps if only theoritically. It's the personal use issue that I couldn't get past, if the client dumped the issue on the original posters desk how can he ignore the information? Please note the materiality (KC's 20%) can't even be addressed due to lack of information. The correct answer in tax and accounting as you well know is always "it depends."

It's too early in the season to get testy. lbb

[Catherine]

<snip>

It's too early in the season to get testy. lbb

Well, lbb, y'know, it depends.

(Don't hurt me!)

[OldJack]

Anyone is welcome to disagree with OldJack as he is used to it. He has been married over 50 years. :wacko:

[Catherine]

With absolutely NO aspersions to OldJack's wife....

It's Sunday morning service at the neighborhood church. All of a sudden, the front doors swing open with a big bolt of thunder and the Devil descends upon the congregation. Everyone starts screaming and running away. All, except for a little, old man, who sits in his pew as if nothing is happening.

The devil walks over to him and asks:

"Old Man, are you blind or something?"

"Nope, I can see just fine", says the old man.

"Well, do you know who I am?" the devil asks.

"Yup, I sure do", says the old man.

"Then why aren't you afraid and running away like the rest of them?"

"You don't scare me!" continues the old man. "I've been married to your sister for the last 50 years!"

[RJM]

Anyone is welcome to disagree with OldJack as he is used to it. He has been married over 50 years.

Thanks OJ... best line I've heard this week !