Rental apartment rented below fair market value

[anonymous8]

I'm renting my apartment to a friend (apartment is abroad). He pays me nothing, but he must pay all the bills, maintenance fees, garage fees (around $100/mo). I treat this as my income, because I would have to pay it, no matter if someone lives there or not. The catch is, that minimum rent in this area is about $400, the average $500. So it’s rented below fair market value, for sure. My question is, how do I tax it?

Can I file Schedule E, with “3. Rents received.” - $1200 and “20. Total expenses.” - “$1200”? This would mean I would not pay any taxes on it, deduct all my expenses from my income.

Or… should I report $1200 as “Other income”, without deducting anything. I would pay taxes on the whole $1200. Is this the way to go? I’m doing standard deduction on my return.

I guess my biggest confusion is, can I even treat it as a real rental apartment (for Schedule E) if it’s rented under the fair market value?

It’s not a temporary deal, he lives there for a while now.

Again, I’m doing standard deduction on my return.

Thank you for help

[ColeenD3]

It is considered a Not-For-Profit Rental.  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. If you do not itemized, you will not be able to deduct your interest and taxes.

Not Rented for Profit

Where to report.   Report your not-for-profit rental income on Form 1040 as Other Income. 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), and  real estate taxes on the appropriate lines of Schedule A (Form 1040). 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.

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.

[anonymous8]

Thank you! So just to confirm, I would put $1200 in the Other Income, correct? 

[npierson7]

Yes, it is correct. Another way to handle that - to ask your friend to make  the payments for maintenance fees, garage fees, etc. directly to management companies, so you won't need to treat this as your income and pay income taxes on that. 

[anonymous8]

Oh. He actually does pay all maintenance fees directly to management companies. I think it doesn't matter, because I own the place and in case nobody would live there, I would still pay these maintenance fees. 

But let me be 100% clear, he pays:

1. Apartment maintenance fee (equivalent to HOA fees)

2. Garage fee

3. Utilities (electricity, internet)

Apartment and garage fees, must paid, no matter if someone lives there or not. So I treat them as my income, because the fact that someone lives there and pay them, saves me from paying these fees myself. 

I don't treat Utilities as income though, because I would pay $0 if I wouldn't live there. You pay only for what you've used.

Is my interpretation correct?

[DianeW777]

Not exactly. It appears you are letting your friend use your apartment without paying rent at all. The fact that your friend is paying fees for their use of the garage, and utilities, these expenses would not be considered income.

However, the friend is paying the HOA fees, on your behalf, and this is a separate matter. Those fees would be considered income to you under the 'Not for Profit' rental rules.  Report that income as 'Other Income'.

Sign into your TurboTax account:

1. Click on Federal Taxes > Wages and Income
   • I’ll choose what I work on depending upon your situation and the TurboTax version you are using.
2. Scroll to the very bottom; Less Common Income; Click Show more (if start isn’t displayed)
3. Click Start across from Miscellaneous Income, 1099-A, 1099-C
4. At the Other Reportable Income screen, enter your description – Not for Profit Rental and then amount of income you received.