My rental is rented out far below FMV to a relative. The mortgage is paid off so I still make a little profit for the rental about $500. Is this still considered a not for profit rental even though I am making a profit?
you have another issue. (Jackson, TC Memo 1999-226). there the taxpayer rented below fair rental value to his parents. The court concluded that the parents' use was personal use by the taxpayer because the rent charged was below fair value. The property was 100% personal-use so no rental expenses (schedule E) were allowed. The taxpayer was still required to include the rent in income. any interest and taxes you pay would go on schedule A and be subject to current tax law limitations.
Thank You for the response. Much appreciated.
So I should be claiming not for profit rental (personal use). Report income as other. Claim property tax and mortgage interest like it was a second home, in my case none since mortgage is paid off. Do not claim expenses up to rental income. And do not claim depreciation. Does this sound about right?
Thank you so much for the reply. This clears everything up and makes sense. I hope this post helps others out who are in the same situation.
One last question. IRS Publication 527 has the following caveat on not for profit rental.
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.
So since I am making a little profit each month do I still disregard this statement and go by Fair Market Value and claim Not for Profit Rental? This is where my confusion comes in. Do I go by Fair Market Value or Presumption of Profit?
the 3 out of 5 rule is not contained in section 280A which controls business use of home, rental of vacation homes, etc. None of the court cases involving personal use of rental real estate ever mention or refer to IRC section 183 - Activities not engaged in for profit. This is the code section that contains the 3 out of 5 rule which can and has been successfully rebutted. The only rebuttal in cases involving 280A was whether the rent was fair. In one case the home was rented to the taxpayer's parents at a 20% discount. The court found that the parents were expected to take unusually good care of the property and management fees were avoided. thus the discounted rent was deemed fair rental value - Bindseil TC Meno 1983-411
There are actually two completely separate rules involved. But for 2018-2025, the treatment is almost the same.
1) Renting at less than Fair Market Value. This is your situation. No deductions are allowed except mortgage interest, real estate taxes and casualty losses.
2) Not-For-Profit rental. This technically is a different rule. This hypothetically could be rented at Fair Market Value, but the circumstances are that it isn't a For-Profit activity. The mortgage interest, real estate tax and casualty losses would be on Schedule A. For years before 2018 and after 2025, this situation (if it somehow weirdly was rented at Fair Market Value) could also claim other rental deductions on Schedule A (subject to the 2% limit). For for the years 2018-2025, those deduction are not allowed.
Okay to make sure we are on the same page and make things simple. The fair market value is what I should be concerned about regardless of profit. The discount I am giving is about 55% to 60% of what the fair market value rent is for the area and it is rented to a relative. So I will treat it as a personal use/ not for profit rental.