My son lives in my 2nd home year round and pays the mortgage which is a lot less than fair rental prices. Do I report it as income or is this a case of cost sharing with a close family member?

[user17523314011]

Because this situation involves a close family member it is unclear if it is considered a rental or just sharing costs.

I take the standard deduction. I don’t have enough mortgage interest and property taxes to itemize. If it is considered income can I deduct expenses related to the home from the income?  Expenses like a new roof, new window?

I see similar questions on here but the answers provided are not in agreement as to whether it is income or not.

I do understand that this is a use for personal purposes situation and not the typical Schedule E rental situation.

Thank you

[Bsch4477]

Sounds like cost sharing. 

[AmeliesUncle]

I disagree with the cost-sharing idea.  

It sounds like your son does NOT live with you.  If he lived with you, the MAYBE cost-sharing could work (although I still think in many cases it would not be allowable).  But not living with you?  No way.  He is paying you to live there (by paying the mortgage).  Just like a non-related party, that is rent.

No, if the rent is significantly below Fair Market Value, those expenses are not deductible.

[M-MTax]

I disagree with the disagreement to the extent anyone (i.e., the IRS) is going to give a hoot provided expenses are not deducted on a return. 

[pk]

@user17523314011 , recognizing the different view points of my colleagues @Bsch4477 , @AmeliesUncle  and @M-MTax , my struggle here is that :

(a) income ( direct or indirect, cash or non-cash) must be recognized  -- unless specifically excluded by statute;

(b) US tax system being "voluntary", depends very much on perjury jurat; also just because IRS does not "catch" each and every infraction, is not license for knowingly ignore facts and circumstances

(c) As a second home and used for personal purposes, you cannot recognize any losses and of course there may be  nil/partial depreciation to contend with.  This includes second homes with mixed usage  ( like rental plus personal usage beyond the allowable 10%).  Only improvements  are allowed to be added to the basis.  Repairs are personal expenses unless deducted against rental expense.  There are of course some more ands, ifs and buts  in such mixed usage case.

(d) Given the above, my position is that you should consider this as rental income  reportable on schedule-E  and if the rental is NOT FMV for the area and type, then recognize the difference as gift  ( probably under the free limit for the year ) to the relative.

(e) Depending on the exact facts and circumstances ( especially antecedents  and  intent at acquisition ) there is the  possibility ( may be  remote ) to consider this as equitable ownership by the  son  -- i.e. it was acquired for the exclusive use of the son  ( whom pays the mortgage, the prop. taxes etc. , uses it as his main residence and paid the down-payment etc. )-- just that the title and mortgage are held by the parent as a stand in for the son.

Is there more one of us can do for you ?

[M-MTax]

It's a personal (second) home, @pk, being used as a personal residence by a close family member; this is not a typical rental property that would be reported on Schedule E.

Even if reported on Schedule E as a rental at below FMV, the result would essentially be a wash with respect to income and expenses so there is little point in reporting it in that manner.

[NCperson]

@M-MTax  it's reportable income and not Sch E. (It would only go on SCh E if the son was paying full market rent). 

It is other income - it can go on  Line 8Z.

the mortgage and interest goes on Sch A, but the OP states he takes the standard deduction, so it can't be deducted.

This is not a wash of income and expense.  It is income

My understanding- 

1) if two people, neither of whom own the property, where one roommate is on the lease and one roommate pays the other who then pays the landlord, THIS IS SHARING.  Neither own the property.  The roomate who name is on the lease does not report the money from the other roommate as income. 

2) if two people BOTH own the property, then any rent received is income to be split based on the ownership agreement between the two owners. 

3) now we have the "in between situation".  One is the landlord and one is the tenant.  It is NOT sharing.  One is the owner!  What are they sharing?  That is the Op's situation. The money received from the tenant is rent!  I would agree that this situation occurs alot and the owner doesn't report the income, but technically that is not right. 

[M-MTax]

@NCperson 

"Sharing" is likely the wrong term as this is essentially a below-market-rate situation (i.e., the son is using the property as his principal residence but not paying full FMV). 

No matter how you view this, it is NOT a scenario where reporting the mortgage payments as income, considering the use of the property as part gift, or whatever is going to make a difference on the OP or the family member's tax returns.

[M-MTax]

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@NCperson wrote:

What are they sharing?

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Upkeep and general maintenance? Ex: Parent owns the home, Son lives there and looks after the property (i.e., keeps it clean, secures it, etc.) and makes the mortgage payment. 

If you take a variation on a theme here, the son could simply make a gift of the same amount as 12 months' worth of mortgage payments (or close thereto) at the end of each year, or the beginning of each year, to the parent. Where's the income in that event?

[AmeliesUncle]

---

@pk wrote:

(d) Given the above, my position is that you should consider this as rental income  reportable on schedule-E  and if the rental is NOT FMV for the area and type, then recognize the difference as gift  ( probably under the free limit for the year ) to the relative.

---

In my opinion, in order to view it that way, the owner would need to report the full FMV rents as income on Schedule E.  If they aren't reporting the full FMV (and only reporting what was actually paid), it is still being rented below FMV (and deductions are lost).

[NCperson]

@M-MTax - sorry but a gift is when there are no strings attached.  There is a string here:  a place to live at below market value.

Not a gift.  

see page 24:

"Not Rented for Profit
If you don’t rent your property to make a profit, you must still report your rental income, however, you can no longer deduct rental expenses."

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

[M-MTax]

Yes, it's arguable, isn't it?

Not a gift but then this is not really a typical "not rented for profit" scenario, is it? 

[NCperson]

@M-MTax - i do not see what is arguable. 

While you may not believe it is a typical "not rented for profit" situation, the IRS sees it as typical as they have covered it in the link I provided above and I provided the specific sentence.   

It is not rented for profit, but it is rented.  That is a typcial situation that the IRS covers. 

Can you please provide something from the IRS supporting your opinion? 

[M-MTax]

You can read through the thread below:

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/17a-what-is-not-for-p...

However, the property is not rented for profit (or not rented to make a profit) because it's being rented to a close relative at less than fair market value, which makes every day a day of personal use by the owner.

https://www.irs.gov/publications/p527#en_US_2024_publink1000285457

BTW, I am DONE with this thread. You can have your opinion on how to handle this scenario, and I can have mine. Period. Thanks.

[NCperson]

@M-MTax while I appreciate you are done and won't respond, I did take the time to read the link you provided.

The personal use is only how to apportion the expenses.  If there are personal use days, the expenses can not be deducted.  If there are rental days, the expenses can be deducted.  I see no discussion in this section about reporting or not reporting the rental income.   Since the son is paying less than market value, all the days the dwelling is used as a home are "personal use days".  That means none of the expenses (other than mortgage and property tax are deductible and those expenses can only be deducted on Sch A). 

The rental income discussion is further up in the link (and I already posted that). 

then further in the link there is this discussion: 

Reporting Income and Deductions

Used as a home and rented 15 days or more.

If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Because you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use, as described earlier in this chapter under Dividing Expenses. The expenses for personal use aren’t deductible as rental expenses.