Not-For-Profit Rental in PA

[foxtax]

I am renting a home to my mom for much less than fair market value, operating at a loss. I have entered this is as miscellaneous income in my Federal Taxes. I see I can only deduct the expenses at the Federal level if I itemize, but I have to take the standard deduction.

How do I report this not-for-profit rental income (loss) via TurboTax in PA? It looks like I have to file a Schedule E in PA for this but I don't know how to do so as I am not supposed to create a Federal Schedule E as this is a not-for-profit rental.

[RobertB4444]

A not-for-profit rental to a family member isn't treated as a regular rental.  By charging a below market rent for the house you are able to disregard the rental income and treat the house as personal use which means just deducting mortgage interest and taxes on schedule A and disregarding the rest.

However, if the family member uses the rental home as their primary residence then you can file a schedule E showing the rental income and then you are allowed deductions up to the amount of rental income.  You are not allowed to show a loss.

Here are the IRS rules on this.

Using any of the three options will solve the problem on the Pennsylvania return.

@foxtax 

[Edited 01/29/2024]

@foxtax

[Keystoneguy]

Thank you for guidance on the approach to handling renting to a family member at a rate below market value.  However, I'm having trouble actually doing that in TurboTax (desktop).  The only way I can get to a screen that discusses Rental income for PA is by selecting "Rental and Royalty Properties - Edit" from the "Show Topic List" menu.  However, what comes up is a screen that says "We don't see any Schedule E for rents, royalties, patents, or copyrights.  This income transfers from your federal return." 
So when I follow the instructions from TurboTax to enter it as other income in the federal side, it doesn't appear that I can report it in Schedule E for the PA return.  Is there a way to use PA Schedule E or should I report it as Miscellaneous Compensation? 
In case it impacts the answer, my relative lives in the rental property all year as their primary residence.

Also, do you have a reference in PA tax rules that say I can disregard the income as rental income?  I haven't been able to find anything that allows me to do anything besides report it in a Schedule E.

[AmyC]

If the house is outside PA, there is no need to report rent.  Since you are not renting to the public, just your mom, it sounds like you have net income instead of rental income. I think you can report is as Misc Compensation for the net income but please go through the PA law. It  is a pretty quick read to verify your situation.

The PA law: Net Income (Loss) from Rents states:

Rents received from real estate and tangible personal property (not employed in the operation of a business) and the costs, expenses and liabilities incurred in producing and collecting such rents are allocable to Pennsylvania only if the property is located in Pennsylvania.

@Keystoneguy 

[Keystoneguy]

I live in PA and the rental property is also in PA.

Based on the feedback, I have reviewed the following.

1. Prep Guide:  “Personal Income Tax Preparation Guide for Personal Income Tax Returns PA-40”
2. PA-40IN:  “Pennsylvania Personal Income Tax Return 2023 Instructions Booklet”
3. PA-40E:  “PA Schedule E” form and instructions
4. Pub 946: “How To Depreciate Property”

Based on this review, my understanding of the requirements / proper way to report this income on the PA-40 return is as follows.

1. Definition of Rental Income
   1. Prep Guide:  “Rental income is income received for the use of real or personal tangible property subject to depreciation.”  (Line 6; page 52)
   2. PA-40IN:  “Rental income includes the amounts you receive for the use of, or the right to use, your real or personal property.” (Line 6; page 18)

>>Take-away:  In order to be considered as Rental Income by the state of PA, the property has to be subject to depreciation.

B. I couldn’t find anything in a PA state publication that discussed whether a property was subject to depreciation, but another website said that PA follows the federal guidelines.

C.  Pub 946:

1.  Basic Requirements to be Depreciable (Overview of Depreciation, Page 4)

“To be depreciable, the property must meet all the following requirements.

• It must be property you own.
• It must be used in your business or income-producing activity.
• It must have a determinable useful life.
• It must be expected to last more than 1 year.”

2. Clarification on Incoming-Producing Activities (Property Used in Your Business or Income-Producing Activity, page 5)

“To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable.  You cannot depreciate property that you use solely for personal activities.”

>>Take-away:  Property which is used solely for personal activities is not subject to depreciation.

D. Rental vs. Personal Use

1. Any day in which the property is rented “…at less than a fair rental price” is considered to be a personal use day.  (Pub 527, Dwelling Unit Used as a Home, pages 27-28)

>>Take-away:  Property rented the entire year at less than fair market value is considered to be used solely for personal use.

E.  Where to Report on the PA-40

1.  PA-40IN:  “Generally, other or miscellaneous income is either compensation on Line 1a, (see Page 10), or business income on Line 4, (see Page 17).”  (PA Income Classes, page 😎

2.  Income from long term (>30 days) rentals not rented with the intent to generate profit does not meet the criteria to be reported on PA Schedule C / PA-40 Line 4.  (PA-40IN, Line 4, page 17)

3.  Income from rentals not rented with the intent to generate profit does not meet the definition of Rental Income (see above), so it would not be reported on PA-40 Line 6.

>>Take-away:  Income from rental property that is not intended to generate profit should be reported on PA-40 Line 1a.

F.  How Much to Report on PA-40, Line 1a (Gross or Net)

1.  PA-40IN:  “CAUTION: PA-taxable interest income (Line 2), dividend income (Line 3) and gambling and lottery winnings (Line 😎 are gross taxable income classes. You may not deduct any expenses in computing these classes of income. In computing compensation, only certain expenses are deductible; see the PA Schedule UE instructions beginning on Page 26. The remaining classes of income are net taxable - you may deduct ordinary and necessary expenses paid or accrued during the taxable year in their production. See the line instructions for each class of income.”  (Deductions, page 9)

2.  PA-40IN: “CAUTION: Generally, PA law follows IRC Section 280A if you rent or lease your property, but do not intend to realize a profit.  Therefore, your rental expenses are limited to your rental income, and you may not use a loss.”  (Line 6, page 19)

3.  PA-40IN: “See the PA Schedule E instructions beginning on Page 33 for the allowable expenses.”  (Line 6, Rental and Royalty Allowable Expenses, page 19)

>>Take-away: The amount of income from the rental reported on PA-40, Line 1a is the gross amount received, less allowable expenses as defined by PA-40 Schedule E, as long as the expenses do not exceed the rental income.

Is this understanding correct? 

[DianeW777]

Yes, you have a good overall understanding.  

>>Take-away:  In order to be considered as Rental Income by the state of PA, the property has to be subject to depreciation.

1. Not exactly. If you own a rental property you will have depreciation on the cost of the property, but you will continue to have rental income even when the depreciation is done in the future (regardless of personal property (anything that is not real property, does not refer to personal use) or real property (land, buildings and structural components).
2. C1. This is correct. PA uses the federal depreciation.
3. C2. The property is being rented for less than fair rental value, no profit motive and therefore expenses as well as depreciation would be limited at the federal level.  

PA does not allow the loss either.  The loss will not be used against any other income category in PA. Schedule E is not required, however in the PA return you should be able to offset the income by the expenses or enter an adjustment to make this income zero.  It does not work the same way on the federal and you just need to keep records to show your what your expenses were and this can include depreciation.  I will show the chart below for 27.5 year property rates of depreciation for each year.  

The miscellaneous income will flow over to PA from the federal return. 

Where to report on the federal return:

Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8. 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.

Sign into your TurboTax account:

1. Click Federal in the left column 
2. Click Wages & Income at the top
3. Scroll down to Less Common Income. Click Show more
4. Start Miscellaneous Income, 1099-A, 1099-C
5. Start Other reportable income
6. Say Yes to Any Other Taxable Income?
7. Enter a description and amount

        

@Keystoneguy