Paid off condo- have family member paying below fair market rent. is this considered personal use property- no rental income, no rental deductions?

[epoe-3]

i have a paid off condo that a family member lives in.   tax return wise, i've considered it as a rental but realize i may be characterizing it incorrectly.

they pay way below market "rent"  no lease/rental agreement, family manages and takes care of repairs with own money. 

is this considered personal use property and not a rental?  

"If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses."

[MaryK1 · Accepted solution]

If you charge below market rent, the IRS usually automatically considers it personal use.  You are 100% correct that it can qualify as your second home for personal itemized deductions.

[epoe-3]

thank you for your answer, the response below conflicts with yours and is confusing

[maglib]

You still claim it as income, you are just not allowed to deduct losses. Per the IRS, "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."

If you enter in the rental section that it is below market rent, TT should walk you through the correct reporting.

Not Rented for Profit

If you don’t rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You can’t 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). Claim your other rental expenses, subject to the rules explained in chapter 1 of Pub. 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income.

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.

 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.

https://www.irs.gov/publications/p527#en_US_2016_publink1000219164

[epoe-3]

this is what i don't understand, "if its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. "  then i don't claim any income nor am i allowed any depreciation because its for personal use- not a rental property. but your saying its "not rented for profit" and i have to claim income even though its not a rental property?

[maglib]

You can take expenses, only to the extent of the income recognized. you can not use losses nor carry forward losses. If you have income though you would recognize it.  Is the family member a child ? you should really review the link I indicated. The concept of personal use is normally for immediate family members using the home.  If you have a rental agreement and are treating it as a rental, then you are subject to below market and market rental rules.

[epoe-3]

yes, i have the 527 publication, that is where i am getting the conflicting information- rental vs non for profit vs personal use.  there is no rental agreement, family manages and pays for own repairs and i understand that falls under personal use, not as a rental or non for profit and therefore i don't need to report income but can't depreciate or take other deductions.

[maglib]

exactly but if those living there claim rent on their state returns you will have an issue....