Do I have to claim rental income when family member pays rent below fair market rate?

[ett9300]

We just purchase a second home.  My father lives there and pays me a monthly rent which is below fair market rate.   He pays for the utilities.  I pay for home owner insurance and property tax.  Do I have to claim his rent money as a rental income?  If I do, can I also claim home owner insurance and property tax as rental expense?

I am filing for the standard deduction.  Thanks.

[Mike9241]

This is an update to my former answer

in Jackson TC Memo1999-2226. 100% personal use, renting to family at below fair rental value, resulted in all the income being taxable but no expenses were allowed to be deducted against the rental income. 

[ett9300]

Thanks.  Questions:

1.   Do I add the Property Tax of my second home and my Main home and enter the total amount to

Schedule A?

2.  I paid for the new roof last year.  Since I can't claim Rental Expense, I cannot claim the new roof either.  Is it correct?

3.  Can my father claim Renter's credit since he pays me rent?

Thank you.

[ett9300]

Thanks again, Mike.  Do you have the name of the IRS publication that said I don't have to report rental income and rental expense when the rent is below fair market rate?  Thank you.

[MinhT1]

@ett9300

If you rent your property below fair market value, the IRS considers that you do not rent your property to make a profit. In this case, 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.

Mortgage interest and property taxes paid can be claimed in Schedule A as for your residence.

Please refer to this IRS document, especially the section on Not Rented for Profit on page 16 of this IRS publicationon how to report income and expenses.

[ett9300]

@Mike9241 

Mike,

Will you be able to provide the IRS publication where I don't have to report rental income and rental expense when I rent to a family member below fair market rate?  Also, can my father claims for renter's credit when I don't report rental income? 

Please note that this is the second home that I rent to my father.  I don't live there.  Whatever information that you can give me will be greatly appreciated!!!  Thank you.

[SweetieJean]

2021 Publication 527 (irs.gov)

[laniermort]

Mu son and his family lived in our home paying below Fair Market Value rent for 5 years while  full time college student.  Is this home considered Personal Use?  I reported this as income in schedule E as I thought was the way to do it.  I've learned that income should not have been reported and mortgage and taxes reported on Schedule A.  What to do to correct this boo boo.  

[NCperson]

@laniermort - file an amendment to correct the errors....

if you move the mortage interest and  taxes to SChedule A, can you itemize????

[Sixgunsammy]

I know that this is an old thread, but I just wanted to lay out the facts.

Under IRC 280A(d), renting to a family member at below market rents does count as personal uses of the dwelling, which causes the normal rental expenses to be not deductible. 

However, it does not circumvent IRC 61(a)(5) which makes the rental income reportable and ultimately taxable.

[Lorator]

If you have a home owned by a 5 member LLC and rented to the daughter/niece of the members as her primary residence at a rent less than FMV, where do you report the rent income on Form 1065-as rent income on form 8825 or on Schedule K? I know the expenses are not deductible with the exception of the property taxes which flow through to the members' Schedule A if they are able to deduct their share of those taxes. But where do you report the income?

[PatriciaV]

Payments received for below-market rent are considered "Other Income." Depending on which version of TurboTax you are using, this topic can be found under Wages & Income >> Less Common Income >> Miscellaneous/Other Income.

The easiest way to find any section of TurboTax Online is to go to Tax Tools in the left column >> Tools >> Topic Search. Type in your topic, click the topic in the list and then GO to go directly to the start of that section. 

In TurboTax Desktop, use the Search box or Topic List found in the header.

Note that you can offset this income by the expenses necessary to maintain the property (report the net income). Mortgage interest and property taxes are reported as Itemized Deductions under the Your Home topic.

[Sixgunsammy]

I am afraid I disagree with your note that expenses can offset income in this situation.  No expenses would be allowed except for mortgage interest and property taxes as itemized deductions.

[DaveF1006]

No. If you're renting to a relative at below-market value, the IRS typically considers this personal use of the property. In this case, you likely wouldn't be able to claim expenses beyond the rental income you collect. 

The only deductible expenses are mortgage and property taxes claimed as itemized expenses since this would be considered like a second home for you.