Bought and moved to a house, my sister now lives in my condo...

[sminch69]

Hello all, appreciate the help 🙂 

I lived in a condo for many years but this year, I bought a house with my husband and moved into it. 

We tried selling the condo but was not successful. Fortunately my sister wanted to move back in town, so she is now living there with her boyfriend. I do not want to profit off my family, so she is just paying me enough to cover my monthly expenses: mortgage, property tax, and HOA. Needless to say it is significantly under market value in terms of "rent".

The condo is still in my name, and we have no written arrangements of any kind, because this is just her landing pad back in town, and she's planning to move somewhere more permanent once she finds what she wants. The plan is to sell the condo when she is ready to move out.

Since I have no intention of owning 2 properties, I am not really interested in any "investment property" deductions... all I'm curious about, is that since this is instead a "personal property" from my understanding, aside from being able to deduct the property taxes and mortgage interest, would I need to report what my sister gives me monthly as "income", because it would be considered "rent"?

[Mike9241]

since your renting below fair value to a family member the treatment for income tax purposes is like it was a second residence. you do not report rental income or expenses

taxes go on schedule A. your deduction for all taxes is limited to $10,000

the deduction for its mortgage interest also goes on schedule A. depending on dates of the mortgage on the condo and home the deduction for mortgage interest may be limited. Turbotax will handle this if the proper info is entered. probably no more than the interest on $1 million in mortgages but if the condo mortgage is after 12/15/2017 the limit is $750,00 of mortgages. possibly even less if you refinanced the condo. 

note that if you wait more than 3 years after moving out to sell, you'll lose the home sale exclusion. 

that's because in the 5-year period ending with the date of sale both spouses must occupy the condo for at least two years in that 5-year period. if only one satisfies the occupancy requirement then they can get the exclusion only for themself. ($250K as of now) 

[sminch69]

I guess what confuses me the most is this part:

Publication 527 (page 16)

Not Rented for Profit
Where to report.

Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8i. If you itemize your deductions, include your mortgage interest and mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

This seems to imply that I would need to report the "income", but also would have no place to deduct the home insurance premium/HOA if I itemized, or any expenses if I do not itemized...?

Unless what I'm misunderstanding is that in my situation, it's not "income" to begin with...

[leeloo]

You are correct. This is a Not-For-Profit rental as Pub 527 describes. You absolutely report the income. You are allowed the Schedule A deductions you would normally get on a second personal home. The pub you referenced give you all the particulars. 

As for HOA and other expenses, the pub spells it out: If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income.  You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

[Mike9241]

when you read a publication read the whole pub. there can be parts that in effect change what was stated earlier. like what's on page 19

I do not want to profit off my family, so she is just paying me enough to cover my monthly expenses: mortgage, property tax, and HOA. Needless to say it is significantly under market value in terms of "rent".

there is a rule for this situation. any day rented below fair market value is a personal use day.  therefore it seems for the year either you used it or your sis used it. therefore, 100% of the use is considered personal use days. 

from page 19 of the pub

Used as a home but rented less than 15 days (any day rented at less than fair value to a family member is not a rental day (IRC SEC 280A) so your rental days are zero.  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 (Form 1040). You aren’t required to report the
rental income and rental expenses from this activity. Any expenses related to the home, such
as mortgage interest, property taxes, and any
qualified casualty loss, will be reported as normally allowed on Schedule A (Form 1040). See
the Instructions for Schedule A for more information on deducting these expenses

if you were to complete schedule E fair rental days would be zero and personal use days would be 365.

i'm not even sure Turbotax would allow 0 to be entered as FRV days because nothing would get reported. 

Prop. Reg. Section 1.280A-3(d)(1)

https://www.bradfordtaxinstitute.com/Endnotes/Prop_Reg_1_280A-3d1.pdf 
Deductibility of expenses attributable to the rental of a dwelling unit used as a residence
(a)Scope. This section provides rules for determining the deductibility of expenses attributable to
the rental of a dwelling unit used as a residence. Note that paragraph (c) of this section applies to
any dwelling unit used by the taxpayer for personal purposes on any day during the taxable year,
whether or not the taxpayer is treated as using the unit as a residence. See §1.280A-1 for the
general rules under section 280A.
(b)Short rental period. If a dwelling unit used by the taxpayer as a residence during the taxable
year is actually rented for less than 15 days during the taxable year,
(1) No deduction otherwise allowable because of the rental use shall be allowed, and
(2) The rental income shall not be included in gross income.

[AmeliesUncle]

Mike, why do you think the income is not reported?

280A restricts the deduction of expenses, but it doesn't affect whether or not income should be reported.

[Mike9241]

@AmeliesUncle 

here's from the reg 

https://www.bradfordtaxinstitute.com/Endnotes/Prop_Reg_1_280A-3d1.pdf 

(b)Short rental period. If a dwelling unit used by the taxpayer as a residence during the taxable
year is actually rented for less than 15 days during the taxable year,

(1) No deduction otherwise allowable because of the rental use shall be allowed, and
(2) The rental income shall not be included in gross income

their rental period is zero because of charging below market rent which makes all days person use days.

[NCperson]

https://www.irs.gov/pub/irs-pdf/p527.pdf

page 16: 

Not Rented for Profit 
If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of
the amount of your rental income. You can’t deduct a loss or carry forward to the next year any
rental expenses that are more than your rental income for the year.

Where to report. Report your not-for-profit rental income on Schedule 1 (Form 1040),
line 8i. If you itemize your deductions, include your mortgage interest and mortgage insurance
premiums (if you use the property as your main home or second home), real estate taxes, and
casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

@Mike9241 @AmeliesUncle - sorry but I am not tracking how the reference cited in the prior thread leads to the conclusion that the below market rental income is not taxable income.  In this case, the sister is renting the unit for 365 days, which is certainly more than 15 days. Where does the link or Publication 527 specifically state that below market rent are defined as personal use days? I don't see that. 

let's say I am quite wealthy and own a luxury 2md home that rents for $50,000 per month, but I rent it for $40,000 per month to my brother which is below market.  That $480,000 of income isn't taxable income to me but I can continue to deduct my mortgage interest? My brother doesn't have to report a gift since it exceeds $16,000?  

The way I read Pub 527, I need to report the $480,000 as other income and I can take my deductible expenses on Schedule A.  If it turns out I am making a profit over a number of years, , different rules apply but let's not go there.

thanks 

[TomD8]

I agree with @NCperson.

When you rent to a family member below FMV, you are considered to be using the rental property personally.  If you do this for the entire tax year, the rental portion is zero.   In effect, you don't have a "rental" property; what you have is a second home.  In that situation the income you receive is not "rental" income, and is not reported on Schedule E.   The income is taxable and is reported as "Other Income" on your Schedule 1, exactly as @NCperson described.

Your only deductions would be mortgage interest and property tax (subject to IRS limitations), and those deductions are taken on Schedule A.

[Mike9241]

@NCperson IRC 280A(d)

(3)Rental to family member, etc., for use as principal residence
(A)In general
A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person’s principal residence.

so the conclusion is if below market rent is charged it's being used for personal purposes.

in other words any day rented at below market value to a family member does not count as a rental day 

but s personal use day. so the number of rental days is zero.      

I have also consulted various authoritative tax reference material they all say this in one form or another

based on the above code section

any day rented to anyone at less than fair rental price is considered a personal-use day and days rented to family members are personal-use days unless fair rent is charged. 

some even contain flowcharts

a) was personal use more than 14 days or 10% of days rented  -  the answer for this situation is yes even if sis rented for the whole year because the annotation above  makes the use by sis personal days and thus zero rental days

b) then it asks was the property rented less than 15 days.  again the same annotation with the same answer  - yes since the days rented by sis do not count as rental days 

c)  this results in the conclusion to treat the "rental" as a personal residence. 

interest and taxes go on schedule A. rental income and expenses are not reported.

pub 527 page19

 Used as a 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
(Form 1040). You aren’t required to report the
rental income and rental expenses from this activity. Any expenses related to the home, such
as mortgage interest, property taxes, and any
qualified casualty loss, will be reported as normally allowed on Schedule A (Form 1040). See
the Instructions for Schedule A for more information on deducting these expenses

it's my conclusion after reading many tax manuals that a day of personal use is not counted towards that 15 days of rental. 

also look at schedule E. two columns

one says fair rental days and the other says personal use days

so what numbers would you enter in each column for sis's rental 

however, you can draw your own conclusion. 

[NCperson]

@Mike9241 all well and good; agree the income (and any related expenses) are not reportable Schedule E...

however, the income is required to be reported as 'other income' on Schedule 1 and related expenses that are normally deductible as a second home are deductible on Schedule A  as described in Pub 527 page 16.....

[Anonymous_]

---

@Mike9241 wrote:

pub 527 page19

 Used as a home but rented less than 15
days.........

---

Yes, but that is not the case here.

The home is not rented "less than 15 days"; it is rented 365 days but at less than fair rental. Thus, Section 280A(g) does not apply and the income is required to be reported.

[TomD8]

Not surprising that there's some disagreement on this question.  Both these statements are from IRS Pub. 527:

"Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8."

"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 (Form 1040). You aren’t required to report the rental income and rental expenses from this activity."

[AmeliesUncle]

---

@Mike9241 wrote:

@NCperson IRC 280A(d)

(3)Rental to family member, etc., for use as principal residence
(A)In general
A taxpayer shall not be treated as using a dwelling unit for personal purposes

---

Mike, back up a little bit because (d)(3) is just expanding (d)(1) and (d)(2).  Both of which say "for purposes of this section".

Then we look what "this section" is about.  Subsection (a) makes it clear that "this section" (280A) is discussing when DEDUCTIONS are allowed.  Except for the special rule involving 15 days in (g), 280A is not about gross income; it is only about deductions.

And as the others have pointed out, the special rule involving 15 days does not apply in this specific situation because was rented for longer than 14 days.

[sminch69]

Oh man... it seems like most of you believe that:

1. I need to report the income as "other income" on Schedule 1;

2.  I get to deduct mortgage interest and property taxes as normal on Schedule A;

3. but I do not get to deduct HOA or home insurance premium as expenses because it is not considered a rental...

It's the last point that hurts me. Because if we're only looking at "other income" on Schedule 1 and the deductions on Schedule A, it would appear that I'm making a profit. But it might be the price to pay for family. And it would mean that there's a 3 year limit for the "Presumption of profit" part of it...