17A - What is "not for profit rental income"?

[PandoraS · Accepted solution]

Not for Profit Rental Income is when you do not rent your property to make a 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. 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.

You can report your not-for-profit rental income on Form 1040, line 21. For example, you can include your mortgage interest (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) if you itemize your deductions.

If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Pub. 535, as miscellaneous itemized deductions on Form 1040, Schedule A. You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income.

[ruchei]

What is the definition for not renting for profit? If I am incurring a loss, I am not getting a profit, but I am considered renting it for profit as long as the rent is within the range in the area I rent in?  Thank you. 

[tagteam]

You are presumed to be renting for profit if your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years.

See https://www.irs.gov/publications/p527#en_US_2018_publink1000219164

[Carl]

The IRS has no clear definition of what constitutes profit or not for profit. It's all focused on intent, not results.

It is rare for residential rental real estate to actually show a profit *on paper* each year; especially if there's a mortgage on the property. But there are several factors that do come into play with the major factor being *intent*.  For example:

 - Are you renting at fair market value?

 - Are you renting to family?

Even those don't really have any clear cut definition either. What is fair market value? Even the IRS can't define that down to a definitive dollar figure.

Fair Market Rental Value – Usually abbreviated as FMRV. This is a rather vague figure that can be difficult to substantiate. Not only can it be difficult for you to prove you rented or are renting the property for it’s FMRV, it can also be just as hard for the IRS or anyone else to prove that you are not. Case in point:

I have a 3 bedroom, 1 ½ bath that I rent for $1000 a month. I also have a 2 bedroom 1 bath that I rent out for $1350 a month.  You’d think those rent amounts would be reversed. But there’s a reason they’re not. You see, the 2 BR/$1350 house is located in a gated community that offers residents the use of a community swimming pool, workout room, weight room, tennis courts, and a few other things. The 3BR/$1000 house is located in a non-gated subdivision that offers nothing of the sort to its residents. Therefore the smaller house is actually worth more to a renter who is preferring those amenities.

The fact that you may be renting at less than your mortgage payments has nothing to do with the FMRV what-so-ever. Back in 2009-10 when the economy was really tanked, the best I could get for the 2BR house was $700 a month. My mortgage payments were just over $800. So was I renting at the FMRV? You bet! With all the unemployment, I was lucky to get “anything” for that property. Those who did have a job and needed a place to live, were working hourly wage jobs anywhere they could find them – even if only part time. I was lucky as all git-out to find a tenant that could actually afford to pay $700 a month. Most of the landlords I know around here had tenants that were roomies together in a 1 bedroom place, just so they could afford to have a roof over their head with them both working and leading their own individual lives just trying to survive through those tough economic times. One landlord friend of mine actually had two families renting one of his 3 bedroom places together for two years. That’s the only way they could afford a roof over their heads.

So based on the above, the best definition I can come up with for Fair Market Rental Value, is this:

WHAT THE CONSUMER IS WILLING TO PAY.

As for profit, you most likely do make a profit which is more commonly referred to in this industry as "cash flow". But chances are not one penny of that profit is actually taxable income. When you add up all the deductible rental expenses they will more than likely exceed your rental income. Once those deductible rental expenses get your taxable rental income to zero, that's it. All remaining expenses are carried over to the next year where than can be deducted, provided of course you have the rental income to deduct them from.

You'll probably find that the depreciation you are required to take by law along with the mortgage interest deduction and other deductible rental expenses will exceed the rental income very year - meaning that the carry over expenses just increase with each passing year. (That's how it's worked for me until a few years after I actually paid off the mortgage on one of my rentals. But that's a whole 'nother story.)

So just looking at the mortage alone, If your payments are $800/mo and you're only getting $700/mo for rent, guess what? There's a profit in there. Remember, the only part of your mortgage payment that is deductible is the mortgage interest. The principle part of your mortgage is not deductible and is considered profit. But the taxability of that profit is then offset by the depreciation you are required to take by law. So in the end, it's somewhat rare for any residential rental property to actually show a taxable profit *on paper*, even though you may be pocketing a cash flow of a few hundred a month.

[tagteam · Accepted solution]

There actually is a definition of an "activity engaged in not for profit", or more precisely a set of relevant factors, and intent does not override those factors in any way. As the Regs specifically state:

In determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer's mere statement of his intent. Treas. Reg. §1.183-2(a)

The relevant factors from the Regs are:

(1) Manner in which the taxpayer carries on the activity.

(2) The expertise of the taxpayer or his advisors.

(3) The time and effort expended by the taxpayer in carrying on the activity.

(4) Expectation that assets used in activity may appreciate in value

(5) The success of the taxpayer in carrying on other similar or dissimilar activities.

(6) The taxpayer's history of income or losses with respect to the activity.

(7) The amount of occasional profits, if any, which are earned.

(8) The financial status of the taxpayer.

(9) Elements of personal pleasure or recreation.

[Negaco]

I have a condo purchased for my son which is rented to him at 60% of fair market value.  I would rent it in the future at FMV if he ever moves out.  I view this as a "not for profit rental" at this stage.  I will enter all rental income  on line 21 and will declare no expenses as I do not file Schedule A.  My question regards is depreciation allowable for this type of property?   I can't claim it but I am afraid it is classified as allowable and when I sell the property In the future I will have to pay the tax on the recapture of the allowable depreciation which I did not and cannot take.  Can anyone clarify this situation?  Thanks.

[tagteam]

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@Negaco wrote:

I have a condo purchased for my son which is rented to him at 60% of fair market value.  I would rent it in the future at FMV if he ever moves out.  I view this as a "not for profit rental" at this stage. 

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Actually, since you are currently renting the condo to a family member for below fair rental value, every day that you are doing so is considered a day of personal use. As such, no deduction for depreciation would be allowed or allowable.

Further, per Section 167, an allowance for a depreciation deduction is applicable only to property held for use in a trade or business or for production of income.

[2385364]

I saw the response below in a post but I found my Form 1040 line 21 is for refund amount. Why is that? Where should I report Not for Profit Rental Income.

"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 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). "

[tagteam]

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@2385364  wrote:

I saw the response below in a post but I found my Form 1040 line 21 is for refund amount. Why is that? Where should I report Not for Profit Rental Income.

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Schedule 1 (Form 1040 or 1040-SR) Line 8 is now the line you would use to report Other income and NFP rental income.

In tax years prior to 2018, Line 21 of Form 1040 was the line designated to report Other income.

[2385364]

I am using TurboTax Primer. I didn't find "other income" under "wages and income" tab. So where am I going to put NFP rental income? I go to the schedule 1 line 8 and I can't enter anything because the field is not editable. 

[tagteam]

@2385364  

Try the Less Common Income section and click the Start or Update button to the right of Miscellaneous Income, 1099-A, 1099-C.

On the following screen, click the Start or Update button to the right of Other reportable income.

[shel4]

Of course, miscellaneous itemized deductions subject to 2% have been disallowed starting in 2018, so for the non profit rental, the additional expenses (aside from mortgage interest, mortgage insurance premium, and property tax), even up to the amount of income, will not be deductible, at least on the federal return. 

[tagteam]

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@shel4 wrote:

Of course, miscellaneous itemized deductions subject to 2% have been disallowed starting in 2018..

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@shel4 Some of the posts in this thread were ported over from the old TurboTax forum and, as a result, the dates on the posts are not accurate (i.e., they could, and probably were, posted a couple of ago, or even several years ago). 

[shel4]

I just wanted to make sure anyone reading on the subject of non profit real estate rentals understood that the income has to be reported, but the expenses cannot be deducted at this time.