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Below FMV Rental income

gfpstaxes
Level 3

Where do I enter "Below FMV" rental income?

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5 Replies 5
BobKamman
Level 15

You try real hard to find a reason it's fair rent.  

Otherwise, it's just "other income," and the interest and property taxes (both subject to limitations) go on Schedule A.  When miscellaneous itemized deductions in excess of 2% AGI come back (is it in 2025?), the rest of the deductions go there.  

Just-Lisa-Now-
Level 15
Level 15
Depends on the reason theyre charging below FMV....is this a relative thats living in the unit, or are the discounting rent to a stranger?

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
gfpstaxes
Level 3

It's their son.

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Terry53029
Level 12
Level 12

Renting at below fair market, is considered personal use. If a taxpayer has any personal use of a dwelling that they rent, they must divide their expenses between rental use and personal use. They must divide expenses even if the dwelling doesn’t meet the definition of a residence. They may deduct only rental expenses on Schedule E (Form 1040). They may be able to deduct some of their personal expenses on Schedule A (Form 1040) if they itemize deductions.

Here is link for irs information:

https://www.irs.gov/newsroom/know-the-tax-facts-about-renting-out-residential-property

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BobKamman
Level 15

I was going to argue with Lisa about this but then I decided she's closer to the truth than I was.  The issue isn't whether the rent is below market, but whether there is profit motive.  I have a client who is renting a house to a family member at lower than market rates.  They were going to sell it a couple years ago, but decided that even vacant real estate was a better investment than Bitcoin or GameStop.  Since then, the property value has increased by at least 50%.  They don't want to deal with a stranger as a tenant, and the tenant/relative is a potential commission-free buyer.  There is no mortgage, so they still show a profit on Schedule E.  

Is it possible to have the other side of the coin -- fair rental value, but no profit motive?  Suppose someone knows they can make 20% in the market but choose to rent to a kid with a good job but no credit and recently released from prison, even though the return is only 5% and real estate prices are declining.  The case could be made that this shouldn't be on Schedule E, but it's unlikely that IRS will be making it anytime soon.  

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