Personal Use of Rental Property & Sec. 280A

It is not unheard of for a landlord to give a break to a tenant who is NOT a family member should they be an otherwise good tenant and they get into "some financial problems". So, for a one month break in the rent to help out a good tenant and avoid a vacancy, costs associated with preparing the premises for a new tenant, etc., I would say the landlord HAS received FMV.

That certainly could be the case. The problem is with proving it. Because when there is a related party transaction, and rent charged is not the highest that could be reasonably collected under the circumstances, it will be presumed not to be market value. The person who says it's market value will have the burden of proving it is.

___ Stu

so, write up you documentation and keep it in your file should the IRS ever ask. Will they? You have 11 months of FMV reported as income, and in this economy they are going to question a slight decrease from last year?

My approach makes perfect sense if the monthly rent is FMV.

========================================= MODERATOR'S COMMENT: Minor quibble - I think you mean Fair Market Rental

well, Alan said Fair Rental Value, which is probably the correct term. But FMV is pretty generic, and it can apply to rentals as well, as far as I am concerned.

Where is "period of use" defined? I think there are two periods of use -- one for the first 11 months where FMV was charged, and one for the last 1 month where it was personal use. In general they might have sold the unit after 11 months, or rented to a different person in the 12th month below FMV.

^^^^^^^^^^^^^^

Note the "any period".

I would claim that for the period January through November (that's a period, right?) TP received "fair rental". Therefore it is not to be treated as being used for personal purposes for that period.

Seth

I understand the point that you and the others are making. I will only tell you that the tax attorney that I have had the discussion with is quite adamant that the use of the words for any period means that when you rent to a family member a property (to be used as the family member's home) for any period whether it be for one month, six months,

12 months 60 months, etc., you have to collect FRV for that period. If you don't, you do not have rental property and your deductions are limited to taxes and mortgage interest. So... if the family member uses the house as their home for the tax year and you don't collect FRV for that tax year, you fail the test. He also said, that he would not sign any tax return that did not include that interpretation. Note that if you rent to a family member let's say from 1/1 to 6/30 and then the family member moves out, you would have to collect FRV for that rental period, not the whole year.

I should have added to my reply that I informed the tax attorney, that I felt comfortable following the IRS instructions for completing the new version of the Schedule E (2011) that asks for FRV days and Personal Use days; instructs me how to calculate personal use days; and instructs me how to compute my deductions. There is no mention in these new instructions about the whole period of use to a family member has to be at FRV.

I see nothing that says that "period of use" has to be the entire tax year.

Therefore, there are 11 months where FMV was collected, so that's a proper rental (280A(d)(3)(1)). That leaves one month which clearly falls under

280A limits such that the time rules in 280A(d)(1) need to be examined: As rent was collected for 334 days (assuming the month FRV not collected was 31 days in a non-leap year), that means that the "personal use" was less than 10% of the period (compare 31 vs 334). Since it was used less than (the greater of 14 days or) 10% of the taxable year for personal purposes, such is IGNORED: no personal use occurred.

I agree that the attorney may be wrong.

However, one does have to look at the number of days for the non-FRV rental period to determine its character. The attorney is right about that.

so, you rent for ten years at FRV and claim the deductions, and then let them stay for a month for free, you have to amend ten years of returns? Yeah, me no think so!

Let's try again.

January is a period. It was rented at FRV for January. Therefore, January does not count as personal use.

February is a period. It was rented at FRV for February. Therefore, February does not count as personal use.

. . .

November is a period. It was rented at FRV for November. Therefore, November does not count as personal use.

December counts as personal use.

(I could do the exact same analysis day by day. Hour by hour would be pushing it.)

Seth

No. Not what he said.

All of this is because it's his daughter, correct?

I have a rental property and the last tenant was there for 10 years. After the first 2 years, I could have raised the rent, but the combination of (a) paying a realtor to show, (b) having a month empty and (c) need to paint between tenants meant the risk to me was nearly 3 months rent vs about 1/2 month's money from an increase. This, combined with the fact that I was 2 hrs away, and this tenant took care of the small issues, calling his own repair guys and just sending the bill, made it work very well. And after a time of no increases, he was well below market.

I'm not arguing the point, I agree with the conclusion here, just observing that the very reason to discount a bit (a missing month is 8% of the year's money) the lower risk, lower expense of taking care of the house, etc, seem to not count for anything when the deal is not arm's length.

"the tax attorney that I have had the discussion with is

I guess I missed something. If you rent for 60 months and don't collect FRV the last month, and the entire 60 months is the "period", how do you possibly do your taxes?

If you collect FMR for 59 months, you are doing it properly for that period of time. If you then rent for less for one month, you are not doing properly for that period of time. ___ Stu

Well, sort of.

The definition of fair market value is what a willing buyer pays a willing seller, neither under any compulsion to buy or sell. In your case, even though you could get more rent, it is financially and psychologically worth it to you to keep the one you have. That is fair market rent.

The problem with a relative is that there is a presumption that the rent is too low. So you'd have to be able to convince a judge that you are really charging the same thing you would to a stranger. If you can, fine. If you can't, you're out of luck. ___ Stu

As I said before, I believe the OP's situation is one in which FRV was received, for these very reasons.

I disagree with his statement that "the way the law was written", but where do we find "the content of the committee reports when the exception for FRV to a family member was added to the Code"?

yes, that is my point. But that is not the position of the Tax Attorney Alan refers to in the OP.