Scenario. Military family received three year orders. They move but keep their home. In their new location they are renting a home. The family plans to return after three years - either through military reassignment or if necessary, retirement. Their home is being rented out during their absence. Due to expenses (mortgage and taxes) there is no chance they will ever show a rental profit in the next three years (or the next five years for that matter). Their combined income is in excess of $150K so the passive losses can only be carried forward.
Questions:
1) Can they treat the rental as not-for-profit and take the mortgage and real estate tax deductions on schedule A? (As noted above, these expenses are in excess of the rent they receive.)
2) Could they claim real estate taxes on Schedule A and omit them from Schedule E? The wording for mortgage expenses is clear (principle residence) but the wording for real estate taxes is a bit different.
I'm looking for any help from someone who may have dealt with a similar situation.
While I have no practical experience with military members who are temporarily renting their homes, I see no reason why this family who merely intends to keep the home occupied and in good repair and hopes to cover some expenses and is not renting to make a profit could not treat this home as a not-for-profit business activity. As such, there is no Schedule E to file.
(As a side note I am familiar with not-for-profit rentals between family members, typically parents and child.)
Chapter 1 of IRS Pub 535 explains how one goes about deducting the expenses for a not-for-profit activity. Note that your deductible expenses can not exceed the rental income. Rental income in this instance gets reported on Line 21, "Other Income" of Form 1040.
I have appended part of Chapter 1 below:
Limit on Deductions
If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. If you are an individual, these deductions may be taken only if you itemize. These deductions may be taken on Schedule A (Form 1040). Category 1. Deductions you can take for personal as well as for business activities are allowed in full. For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Deduct them on the appropriate lines of Schedule A (Form 1040). You can deduct a casualty loss on property you own for personal use only to the extent it is more than $100 and exceeds 10% of your adjusted gross income. See Publication 547 for more information on casualty losses. For the limits that apply to mortgage interest, see Publication 936.
Category 2. Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category.
Category 3. Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Where more than one asset is involved, allocate depreciation and these other deductions proportionally.
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