How do you record the sale of a "not for profit" rental property?

[cdgjmbcdgjmb]

I bought a house in 2014 for my son to live in expecting to also rent to a roommate and make a profit.  Intention was to have a "for profit" rental.  This never happened.  Each year I had a loss between rent received and rental expenses.  I sold the property in 2017.  Also, in 15 and 16, TT led me to put in personal days of use for the days the property was not rented at fair market value, so I now have a complicated mixed used property with varying days of business vs personal use each year.  I have worked through the math and recorded the sale as partial business and partial investment according the average percentages of use, and recaptured the depreciation and losses, but from what I have read, the IRS will likely disallow the business and characterize this whole venture as a "not for profit" rental (family member occupied, business loss each year). So, what is the best option?  If I make the sale as "not for profit,"  how do I record it?  Do I have to amend 2014-16 returns?  I never had any profit (expenses offset the rent received each year) so line 21 was always 0 anyway, and the carry over losses have never been allowed. They have carried over to this year and help offset the depreciation expense as I have computed the sale. If I sell as "not for profit rental" I think the net tax result is about the same as what I have already computed, but I would prefer to not have the IRS question my return.  I would greatly appreciate experienced advice.

[Coleen3]

Did you ever have a renter or just your family member?

[cdgjmbcdgjmb]

thanks Coleen.  Yes, I had a (non family) renter from Oct 14 thru Mar 15.  My son was there as well.

[Coleen3 · Accepted solution]

Basically, you had a not for profit rental. Out of around 36 months, you had a tenant for 5 and a relative for the entire rest of the time a less than full rental value. The way it should have been done is below. I don't know what each return looks like but I'm pretty sure you will need to amend. Since you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. You do not therefore, need to depreciate.

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 AS OTHER INCOME  Schedule 1 (Form 1040), line 8 (after 2017 TCJA)

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.[ You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. PRE TCJA RULE- NOT VALID AFTER 2017]

Presumption of profit.   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

More information.   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.

 https://www.irs.gov/pub/irs-pdf/p535.pdf 

[cdgjmbcdgjmb]

Sounds pretty simple except I have to go back and amend three returns to clean up schedule E.  May change my taxes slightly in those years.

[cdgjmbcdgjmb]

do you record the sale in investment income or some other place?

[cdgjmbcdgjmb]

which category of misc income do you record the rent in?  Nothing seems to fit except "other income"

[Coleen3]

Yes, it would be like a second home, in the investment section.