Rental Property

Only if you charge less than Fair Market Rental.

If you chage less than FMR to a stranger, because you really are desparate for income and not willing to leave it go unrented while someone meets your rent, that can usually be sold, and you still have a schedule E rental property.

But if you charge less than FM to a related party, you are no longer entitled to use Schedule E netting of income and expenses.

Rather, income goes to 1040 line 21. Expenses, but not more than income, goes to schedule A as a 2% Misc Deduction.

Not universally true. Schedule E treatment is still available as long as there's no loss.

Then isn't the amount you're charging FMR by definition?

Seth

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I have to agree with Dean. The mere fact that one is willing to accept rental payments from a family member that are less than what one would accept from an unrelated party does not mean you are not renting for a profit. As long as there is a profit, one can use Schedule E. Renting to a family member at a price that is less than what one could get on the open market can easily be justified by the advantages that accrue from having someone you know in the house. The family member will take better care of the home. The family member is willing to make routine repairs. The family member will always pay and on time. etc. etc.

I'm not sure if an IRS agent would accept those reasons after "can easily be justified ..." above. For example, if the family member makes $2000 of repairs a year, but the owner reduces the rent by $2000, then the owner might as well have charge full price rent and done the $2000 repairs themselves and deducted it on Schedule E.

The point I was making is that FMR is not a black & white number. FMR is a function of all the facts and circumstances surrounding the rental agreement. Some of those facts can be quantified in dollars and cents and some of them can not. I firmly believe that the IRS will not question the amount of rental income on a family rental that shows a profit on the Schedule E.

Only if willing parties on each side acting without duress.

Since duress has entered the picture, I'd say No.

Speaking of FMRs or FMVs:

Owners' association of a local "gated resort community" where I have a house actually owns all the land, including building lots under the houses, and gives long-term leases on each lot to individual owners. When an owner moves out and sells their house, the assoc normally writes a new lease to there new owners.

There is, however, fine print in all the leases which says that if the assoc wants or needs to acquire a particular lot for assoc purposes (e.g., some recreation facility), it has a "right of first refusal" at the time the owner moves out and puts the house on the market, to purchase the house at an appraised* price -- **and it choses the appraiser**.

At the minute the assoc is exerting this right wrt a departing owner (actually, wrt to his estate, since he departed to the big resort community in the sky); their appraisal/offer is several hundred K under a firm purchase offer made by an outside buyer; and they're playing hardball on the matter.

Leaving aside the interesting legal battle that now appears imminent, if the assoc wins on this one, will the owner or his estate have any kind of deductible casualty loss or equivalent on the "lost income"?

I don't think that includes "market duress". For example, if you realize that each month a property goes unrented means more negative cash flow, and that by lowering your rent, you become more competitive compared to your fellow landlords, I think your decision to lower the asking rent would be considered "FMV" -- otherwise, how would FMV rents ever go up and down?

-Mark Bole

This is the same as the recurring question: "I did some work for X and they never paid me. Can I deduct the amount of pay that I lost?"

You can't take a deduction for income you never received. By selling at a lower price, the estate will pay less tax because it will have a lower profit, or a bigger loss, on the sale. It does not pay any tax on the income it did not receive. The "lost income" is effectively "deducted" because it is never reported as income in the first place. But there is no direct deduction that would show up on a tax return.

Bob Sandler

If the appraisal for tax purposes is (say) $700,000, and the association gets to claim it for (say) $500,000, then there's a $200,000 capital loss to the estate.

Seth