A client who resides in Wisconsin purchased a 2nd home in Florida and rented it at FMV to my daughter. He also spends 5 months in the Florida home during the winter. She set aside a large bedroom for him but he also has access to other areas in the home such as the kitchen, living room, porch, etc during the time he resides in the home. What are the tax implications for such a situation?
Without looking anything up, it looks like 5 months of personal use by your client to me.
Yes, but he's still renting out the part he's not using. And he's not renting it to one of his relatives, but to the relative of someone he works with.
Personally I don't see any tax issues, with the possible exception of a minor reduction in depreciation for the part of the house he uses during the time he uses it.
-- Stu
The "elephant in the room" is the relationship between the OP's client and the OP's daughter.
I'd take Stu's response one step further and ask "who uses the large bedroom that is set aside for the owner for his annual visit for the rest of the year?" In other words, is that bedroom vacant all the time unless the owner is there? If yes, then I'd adjust the business use by the square foot percentage that the renter does NOT have full access to.
Gene E. Utterback, EA, RFC, ABA
You have personal use of the dwelling unit for more than the greater of
14 days or 10% of the total rental days. As such, the client must allocate the rental expenses between rental use by the tenant and the personal use using the rental days and personal days for the allocation. Note that any day the house is rented and also used for personal purposes is not counted as a rental day. So, if the home was rented for 365 days at fair rental value and the client used it for 152 days, then you have 213 rental days and 152 personal use days. That's 58.4% for rental use. So, 58.4% of rental expenses can go on the Schedule E. All rental income received goes on the Schedule E. Any mortgage interest and property tax that is allocated to personal use can go on the Schedule A if the client itemizes. Lastly, the client can not deduct any rental expenses in excess of the rental income. They get carried over to the next tax year.Please note, that I am not aware of any ruling that would allow some other method to perform the allocation. That's not to say that one doesn't exist. His personal use on any given day makes that day a personal use day even if rent is paid for that day.
So if you are renting out a room in your home, that's counted as no rental days? The code says that when renting for 14 days or less you don't recognize either the income or deductions. Would that be the rule for renting out a room?
Perhaps he would be better off renting a room in the house when he wished, rather than keeping it for rent-free personal use.
Thanks for the reply. Your mentioning of renting a room, triggered my brain. The number of days are used to determine whether the property was used as a home by the owner. In the example I gave, the home is considered to have been rented for 213 days (365 - 152). 10% of that 21 days. Personal use was 152 days. Therefore, we have a house that is considered to be the owner's home. Where I goofed, is how the expenses get divided. The rule for dividing the expenses, has as the numerator the total number of days rented regardless of the fact that the owner may have used the house for personal purposes while rented. Therefore, the ratio in my example for allocating expenses is 365/365 = 1. All expenses are deductible on the Schedule E. However, the owner could not report a loss because the house is treated as a home. Any excess expense gets carried over.
Back to your question. If you rent a room in your home for 14 days or less, you have minimal use of your home as a rental. As such, you may exclude the rental income from gross income. Obviously, you have no rental expenses.
Thanks for the reply. Your mentioning of renting a room, triggered my brain. The number of days are used to determine whether the property was used as a home by the owner. In the example I gave, the home is considered to have been rented for 213 days (365 - 152). 10% of that 21 days. Personal use was 152 days. Therefore, we have a house that is considered to be the owner's home. Where I goofed, is how the expenses get divided. The rule for dividing the expenses, has as the numerator the total number of days rented regardless of the fact that the owner may have used the house for personal purposes while rented. Therefore, the ratio in my example for allocating expenses is 365/365 = 1. All expenses are deductible on the Schedule E. However, the owner could not report a loss because the house is treated as a home. Any excess expense gets carried over.
Back to your question. If you rent a room in your home for 14 days or less, you have minimal use of your home as a rental. As such, you may exclude the rental income from gross income. Obviously, you have no rental expenses.
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