Should I amend the tax to include a not-for-profit rental 51% of FMV? No deductions claimed. Brother with lease occupied newly build in-law unit that cost $85K to build.

[celsius888]

I build an in-law unit in my property, attached to my original house with complete permit to help brother to have a place to live. Put him on a lease for my protection and has expired a long time ago. He pays same price as the room he previously rents but with kitchen & private bath and 1 bedroom that's why it's only 51% FMV. Never claimed in my tax any of construction cost and any cost related to his additional expense renting. But recently, my coworker mentioned his similar case, he said still need to be reported. Should I amend the 2016? and how do I add the construction cost?   Not really interested in any deduction if it will complicate my tax. Thanks.

[Carl]

This is not a not for profit rental, no matter how you look at it. All income from all sources is required to be reported on your personal tax return, unless there is a law specifically and explicitly waiving that reporting requirement. (Such as VA disability pay for example).You need to amend your 2016 return and report all rental income and expenses on SCH E. Note that by law you are "required" to report your expenses too. At an absolute minimum, you will have a property tax expense. It's also common to have an expense for mortgage payments and insurance on rental property.
Also, weather you have a rental contract or not doesn't matter. All income from all sources is required to be reported, unless specifically waived by law.

[juliob]

The following is from Publication 527:

"Not Rented for Profit

If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot 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 Form 1040 or 1040NR, line 21. If you are filing Form 1040 and you itemize your deductions, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040). Claim your other rental expenses, subject to the rules explained in chapter 1 of Pub. 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income." - <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p527#en_US_2016_publink1000219143">https://www.irs.gov/publications...>

[Carl]

That's a reason to go ahead ahead and report it on SCH E. That way, all rental expenses up to the rental income are deductible. Otherwise, if your total itemized deductions for everything (not just rental expenses) don't exceed 2% of your AGI, then nothing is deductible.

[juliob · Accepted solution]

Since you rented your in-laws unit and receive rental income, you are required to report the rental income on your 2016 return, Form 1040 - Line 21. 

Although you did not rent your property to make a profit, you may be able to deduct your rental expenses only up to the amount of your rental income if you itemize. If you itemize your deductions, you may be able to deduct your rental expenses on Form 1040 - Schedule A. Some of your rental expenses are subject to the 2% adjusted gross income limit, see Limit on Deductions in Chapter 2 of Pub. 535.

The type of items you may deduct are shown in the following article:

• https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71

For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Pub. 535.

[TaxGuyBill]

@celsius888   In direct answer to your question, yes, if you did not include income on your tax return, you should amend.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/1894381-how-to-amend-change-or-correct-a-return-you-already-filed"...>

[celsius888]

I tried to Amend and here are the results. The newly build attached unit is 24% of total living space. Entered the $7,200 total rent received, Total Mortgage Interest was $24K, Property Tax was $7,300, Insurance $600. There was a refund of $5K Fed and $2K State. After I reviewed, went back to Schedule A and adjust the Original Mortgage interest to 76% of total received from my House lender and also adjusted the Property Tax on Schedule A to show only 76%. Both refunds were cut down to about half.  My adjusted gross income is over $150K, why do I have refund?  I still feel something is wrong, perhaps the Cost basis or Depreciation worksheet?  Entered $85K on the cost to build the unit, Land Value of the unit based on Property Tax statement is $41K (which is 42% of total land value of the house). I have very few numbers to enter but not sure if I've entered it in the right places.

[TaxGuyBill]

It seems like a not-for-profit rental, which goes on Line 21 of your tax return ("other income"), not Schedule E as a rental property.  If you were to start entering it as a Rental Property, the screen that asks for the number of rental days specifically say to treat rental days at less than FMV as personal days.

The depreciation and insurance would be limited to the category of 2% of your income, so they probably won't end up doing anything.  For a not-for-profit rental, you leave all mortgage interest and real estate taxes on Schedule A.

So the 'net' result is that you would be adding $7200 of rent to you tax return, and due to the 2% limitation, there will probably not be an additional deductions.

This link should give you an idea for how to enter information on Line 21:
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3771966-how-do-you-delete-amount-in-other-income-line-21-on-form-1...>