Below fair market value rental income

[JeffCPA]

Mom and Dad own a property that they rent to their adult daughter for $1,000 a month.  This is well below fair marker value.  Daughter is living at this "rental property" 365 days of the year, and has paid Mom and Dad $12,000 of income.  

It is clear to me from reading IRS Pub 527, that this dwelling unit is considered to be the home of Mom and Dad, because it has sufficient days of personal use by their daughter.  

So, certainly this cannot be treated as typical/usual rental property, and the only expenses that can be claimed would be property taxes and mortgage interest on Schedule A, Itemized deductions.   However, I am finding conflicting information as to whether the $12,000 of rental income that daughter paid to Mom and Dad must be claimed as other income by Mom and Dad on their 1040. 

527 has wording as followings:  "Used as home but rented less than 15 days.  If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function isn't considered to be rental and it shouldn't be reported on Schedule E.  You aren't required to report the rental income and rental expenses from this activity."

But also this wording:

"Used as home and rented 15 days or more.  If you use a dwelling unit as a home, and rent it for 15 days or more during the year, include all of your rental income in your income.  Becuase you used the dwelling unit for personal purposes, you must divide your expenses between rental use and personal use as described earlier."

I assume that the language here of renting 15 days or more (or less) is referring to renting at fair market value.  Proseries software Schedule E worksheet asks for "days rented at fair value" and Pub 527 worksheet asks did you rent the unit at a fair rental price for 15 days or more.    If my assumption is correct about this, then "renting" this property to the daughter for 365 days, but at less than fair rental value means Mom and Dad have rented the property at zero rental days at fair rental value.   And in that case the $12,000 of rental income daughter paid them does not have to be reported as other income or any kind of income on Form 1040.    Am I reading and understanding this correctly?   

[Just-Lisa-Now- · Accepted solution]

Income would go on the Other Income line (Not For Profit Rental Income) and the mort int/prop taxes would be deductible on Sch A.

[Terry53029]

If you rent a vacation home at below market value it is considered Personal use. You don't report income or expenses

[sjrcpa]

Section 280A does not say don't report the income. It does limit the deductions.

[Terry53029]

How do you report income when it is considered personal use only, no rental use at all

[sjrcpa]

Then there wouldn't be any income to report.

Here we have $12K income.

[Terry53029]

Section 280A has to do with disallowance of expenses  in connection with business use of home. It seems to me the daughter is just giving the parents a thank you gift for letting her use the families personal vacation home.

[TaxGuyBill]

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@Terry53029 wrote:

It seems to me the daughter is just giving the parents a thank you gift for letting her use the families personal vacation home.

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That is not what the OP said.  The OP said she is paying $1000 in rent to live in the home.

And a Gift is a no-strings-attached thing.  It seems like the parents are expecting the $1000 a month, and if she quit paying, the parents would question her on it.  That would NOT be a Gift.

[TaxGuyBill]

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@Terry53029 wrote:

Section 280A has to do with disallowance of expenses  in connection with business use of home.

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Yes, this a rental of their home, therefore 280A applies.

[Terry53029]

Like you said "that is what the OP said" What would the clients say

[TaxGuyBill]

It is very unlikely the client would say "we are letting her stay there for free, but she does give us some thank-you gifts".

[Terry53029]

The OP said it is rented at below market rate therefore no business, it is personal use only

[TaxGuyBill]

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@Terry53029 wrote:

The OP said it is rented at below market rate therefore no business, it is personal us only

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You may want to look at 280A again.

[Terry53029]

@TaxGuyBill This is the general rule of 280A

(a)General rule

Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.

If a taxpayer uses or rents at below market rates it is considered personal use, and not a business.

[TaxGuyBill]

Keep reading.  Go down to (d).

[Terry53029]

Throughout the complete section it keeps saying "for which such unit is rented, or is held for rental, at a fair rental".

[TaxGuyBill]

@Terry53029   I'm trying to figure out what you are trying to argue.  Maybe we are just miscommunicating.

Fact #1:  The OP said it was rented.  There is no evidence otherwise.  That means it is income.

Fact #2:  The OP said it was rented as less than Fair Market Value.  If you carefully read 280A(d), you will see that is considered as personal use, therefore no deductions are allowed (except mortgage interest and real estate taxes on Schedule A).

So what are you trying to say?

[rbynaker]

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@Terry53029 wrote:

Section 280A has to do with disallowance of expenses  in connection with business use of home. It seems to me the daughter is just giving the parents a thank you gift for letting her use the families personal vacation home.

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I agree, 280A is a red herring (unless we circle back and start talking about expenses).  In terms of income, that's section 61.  "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived."

The income is taxable income.

[Terry53029]

Lets not forget Section 102 "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance".

[TaxGuyBill]

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@Terry53029 wrote:

Lets not forget Section 102 "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance".

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I agree with that, but there is NOTHING that indicates that this is a Gift.

[rbynaker]

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@Terry53029 wrote:

Lets not forget Section 102 "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance".

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Or section 119, Meals or lodging furnished for the convenience of the employer.

Look, we both can introduce code sections that are completely irrelevant to the facts presented in this discussion. 🙂

[IRonMaN]

I'm really not into quoting tax codes (or reading them for that matter), but I am curious about one aspect.  Do they actually have a signed lease agreement with the kid, or is the kid just reimbursing the folks for some of the costs incurred in that property while she is breathing their air?

[jofijohnjoseph]

This is a case where there are tax laws, and then there is common sense.

If I were preparing these client's returns, I would not be reporting any rental income received and would simply consider this property as a second home owned by the taxpayer.

If it weren't the daughter, and instead a non-relative renting the property, I would have a different response.  But this isn't really a rental situation as we classically understand it, and it is silly to parse the laws and text of the IRS code.

For all those who disagree:  if an adult child moves back into the family home and pays some rent because the parents don't want them there as freeloaders, are you going to generate a Schedule E to capture this "rental income"?

[Terry53029]

As we all know intent is in quite a bit of tax law. I believe renting a 2nd home at below market rates is taxable income, but I think that would apply to some one renting to strangers just to offset some expense, but not to my kids. 

[JeffCPA]

A great many different views and answers here.  I have found conflicting answers online as well.  

[CedarBill]

Are you seriously arguing that income isn't taxable unless it's generated by a business?  Check out Pub 527, page 16, "Not Rented for Profit".  "Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8j"

[abctax55]

@CedarBill 

Do you want to finish the rest of that quote from Pub 527 as to where the expenses should be reported?

[rbynaker]

Wasn't this poor horse beaten enough last year?

[abctax55]

Rick, obviously not 🤣

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[IRonMaN]

[CedarBill]

Schedule A . . . which unfortunately means only mortgage interest and property taxes since TCJA did away with miscellaneous deductions