Renting condo to family/friends without profit

[aqua_man]

Hey Guys,

If I were to rent my condo to family/friends for exact amount of my mortgage + insurance + HOA and they pay me via check or any online money transfer services, does it becomes my income where I have to claim on my taxes next year? And do I get to deduct the interest I paid through out the year on that mortgage?

I am trying to rent my condo to a family/friend and only planning on charging them whatever my mortgage + insurance + HOA is.
I do not want to be in a condition next year where I get taxed on the rent I received and cannot deduct the interest I paid on that mortgage.

Thanks.

[AmyC]

Yes, you will claim the income along with expenses to maintain, mortgage interest, etc and you will claim depreciation. Start with What kinds of rental property expenses can I deduct?

See:

About Schedule E (Form 1040), Supplemental Income and Loss  &

Publication 527 (2020), Residential Rental Property - IRS

[aqua_man]

@AmyC  Thank you for your response.

I have an additional question, would I be able to deduct the interest which I paid on the mortgage through out the year?

Also, if I'm claiming the rent as income and going to pay taxes on it, I'll be losing money come tax season.

For example, if my mortgage is $1000, I collect $12000 per year, will that $12000 becomes my income and would I have to pay taxes on it? Because technically I didn't make any profit on it, so I should not be paying taxes on that rent.

[JohnB5677]

Yes, you should include the income and the interest on Schedule E, but because you rent to relatives it can be tricky.  

• You must charge a fair-market rent.
• To prove the rent rate is fair, you can get information from places where similar properties are listed for rent, such as Craigslist.
• You can also get a rental appraisal from an independent appraiser or a realtor.

[TomD8]

Not-for-profit rental income and expenses are not reported on Schedule E.

From IRS Publication 527, page 16:

Where to report. Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8i. If you itemize your deductions, include your mortgage interest and mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

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

[Hal_Al]

Because you are renting to family, you do not have to collect Fair market rent.  You can discount it because family will take better care of your property.  How much less is fuzzy and subjective.  I'm of the opinion that if they're covering  mortgage + insurance + HOA, you're on solid ground.

Report the income (enter at Rents & Royalties/Income & expenses from Rental Properties); and then deduct the expenses on schedule E.  Your net income will usually be less than zero.

What you are NOT allowed to do, because it is really your 2nd  home (not rental/investment property) is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.  Your expenses are deductible (mortgage interest [not the full mortgage payment], property taxes, insurance, utilities, repairs, and depreciation [if needed}). Your net income will usually be less than zero.

It is possible for you to gain a positive tax effect from this activity; If enough of your schedule A deductions (mortgage interest &  property tax) are shifted to Schedule E, and your standard deduction becomes bigger than your itemized deductions, you will have effectively saved on taxes.

TurboTax (TT) does not handle this properly. TT will not limit your deductions to your income. You have to do that manually. TT wants you to enter this as a “not for profit rental”, which does not use Schedule E and puts your expenses on Schedule A (itemized deduction). I'm of the opinion that's not the proper way.

[Carl]

When renting to family at below FMRV, you can only deduct those expenses up to the income received. Expenses that exceed the income are lost, and can not be carried over.

If rented "not for profit" then schedule E isn't used, and no expense deductions are allowed at all. However, you can still claim mortgage interest and property taxes as a SCH A itemized deduction. But as usual, your itemized SCH A deductions don't make any difference to your tax liability until they exceed your standard deduction.

[Anonymous_]

Note that if you rent to a family member which, as defined in Section 267(c)(4), would include siblings, spouse, ancestors, and lineal descendants, then per Section 280A(d)(2)(A) each day of rental is considered a day of personal use by the owner unless the family member pays a fair rental price and the family member uses the unit as a principal residence (per Section 280A(d)(3)(A).

[Anonymous_]

---

@Carl wrote:

When renting to family at below FMRV, you can only deduct those expenses up to the income received.

---

It is a day of personal use even if the owner charges "FMRV" unless the family member (as defined in Section 267(c)(4)) uses the rental as a principal residence.

[TomD8]

Property rented to a family member (or anyone else) below FMRV is not considered rental property by the IRS, and income and expenses are not reported on Schedule E.

https://www.irs.gov/newsroom/know-the-tax-facts-about-renting-out-residential-property

[Anonymous_]

---

@TomD8 wrote:

Property rented to a family member (or anyone else) below FMRV is not considered rental property by the IRS, and income and expenses are not reported on Schedule E.

---

Exactly. It is property held for personal use. 

However, it is even more stringent for family members (defined in Section 267(c)(4)). Even if the family member pays FMRV, it is still considered personal use unless the family member uses the property as a principal residence (i.e., main home).

[TomD8]

This website allows you to look up current FMRV's (as determined by HUD) by zip code:

https://www.huduser.gov/portal/datasets/fmr.html