Child Living in Property I Own

[Anonymous]

My son may be living in a property I own while he attends college. He will be paying rent only to cover expenses. How is this handled from a tax situation? 

[Mike9241]

@Anonymous 

from my reading of the iRS rules the income is not taxable nor reportable

here is what i read as the rules

1) was personal use (this includes days rented at less than FMV) greater than 14 days or 10% of days rented?

It seems that since FMV won't be charged the answer to this question is tes

2) if 1 is yes, then was the property rented less than 15 days? again days rented at less than FMV are not rental days. so the answer to this is yes

3) since 2 is yes the IRS says treat as personal residence. do not report income or expenses.  There is nothing that says treat a second residence any differently than rental property.

in fact the IRS says any day rented to anyone at less than a fair rental price is considered a personal-use day. Days rented to family members are persona-use days unless fair rent is charged (which is not the case here) and the unit is the family member's main home (IRC Sec 280A(d)(3)  

[NCperson · Accepted solution]

@Anonymous I appreciate there are two different points of views posted above.

In support of @Mike9241 's post, your property ismtechnically  NOT being rented, using the IRS definition of 'rental days'.  It's all "personal use" days. 

Note that on page 18, A personal use day includes: 

2. A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as their main home and pays a fair rental price. Family includes only your spouse, siblings, half siblings, ancestors (parents, grandparents, etc.), and lineal descendants.

Therefore, all the days of use are 'personal days' and not 'rental days'

then, on the right of page 19 it states: 

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. 

So the rent inome does not need to be reported.  Mortgage interest and taxes can be deducted on Schedule A. 

[Anonymous]

Thank you!!

[Opus 17]

"How is this handled from a tax situation?"

Simple answer, you ignore it.  You have a second home, that your son happens to live in and share expenses.  You may be able to deduct the mortgage interest on your personal tax return (you can deduct mortgage interest on your "main home" and one second home, up to a limit of $750,000 of mortgage balance).  You may be able to deduct the property taxes on your personal tax return, up to the $10,000 cap on all state and local property and income taxes.  You ignore expenses, depreciation, and anything else.

To treat the home as a rental on schedule E, which would allow you to deduct your expenses including mortgage, insurance, utilities and depreciation, you would have to rent for profit, at the fair market rent (what you or another landlord would charge an unrelated person for the same or similar property in the same area).  You said you aren't doing that, and there are some good reasons for not doing it that way when renting to family.

So best to treat it as family living in your other home and helping with expenses.

[AmeliesUncle]

I disagree with the reasoning of the others.  

By that reasoning, you would seemingly be saying that there is no such thing as a not-for-profit rental.

[Opus 17]

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@AmeliesUncle wrote:

I disagree with the reasoning of the others.  

By that reasoning, you would seemingly be saying that there is no such thing as a not-for-profit rental.

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A "not for profit" rental would be renting to an unrelated person for less than fair market value.

Renting to a relative, specifically a lineal descendant, at below market rate, is a personal use.

"A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as their main home and pays a fair rental price. Family includes only your spouse, siblings, half siblings, ancestors (parents, grandparents, etc.), and lineal descendants."

[AmeliesUncle]

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@Opus 17 wrote:

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A "not for profit" rental would be renting to an unrelated person for less than fair market value.

Renting to a relative, specifically a lineal descendant, at below market rate, is a personal use.

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Look at §280A(d)(2) [specifically, (C)] and you'll see that unrelated people at less than fair market value is also "personal use" for §280A.

" the taxpayer shall be deemed to have used a dwelling unit for personal purposes ... by any individual ... unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental"

https://www.law.cornell.edu/uscode/text/26/280A#d

Section §280A is about deductions.  Except for the tiny tidbit about the 14 day rule in (g), it is discussing whether or not you can deduct expenses, not if it is income.