Second Home with Not-For-Profit Income

[helin]

I have a second home which I stayed in for 16 days.  As such I believe the mortgage interest and property taxes are deductible in full.  However, I also rented it out for 11 months at less than the fair market value (50%) as part of the purchase contract with the previous owner.  As such, those are personal-use days.  I believe I need to report the income from this as misc income/income from a not-for-profit activity AND I can deduct the utilities, mgt fees and repair bills up to the amount of the misc income.  Any thoughts on this?

[TaxGuyBill · Accepted solution]

That all sounds correct.

However, be aware that you must report ALL of your income, but the deductions are limited to the amount OVER 2% of your total income.  In other words, the deductions for utilities, management expenses, and repairs may be significantly reduced or eliminated, but you will still be paying tax on the full amount of income.

As a side note, were you paying the utilities?  Those are usually paid by the renter (but perhaps your contract says otherwise).

[helin]

Side Note: The mortgage int and prop tax is a $23K deduction and the rental expenses I paid (utilities, mgt fee, ins) are over $8K: only collected $11K in rent.  The $23K more than offsets the $11K and any of the $8K above my 2% misc is icing on the cake.  Have to go this way since trying to claim as as a Rental would result in a significant loss (passive carry-over) and the low rent would be a definite Red Flag.

[TaxGuyBill]

Sorry, now that you've given numbers to it, I realized my answer was wrong in your circumstance.

No, the $8000 of 2% expenses are NOT deductible.

Even though the Mortgage Interest and Real Estate Taxes are fully deductible, they still 'use up' the threshold for using deductions up to the income.  In other words, because the Interest and Taxes were higher than the total income, nothing else is deductible.

[taterhedg]

Similar situation for me:  purchased a second home (condo) in Seattle.  I’m allowing my daughter to occupy the unit as her primary home.  Daughter pays 20-30% below FMV as 'cost sharing.'  No lease, no rent agreement.
  
My first year, 2016, I plan to treat as a 'personal use second home’ and treat the income/expense activity as a 'not for profit rental' Form 1040 21/23 misc

I'm going to report cost-share/rent received as "not-for-profit rental income on Form 1040, line 21" and report other rental expenses--not to exceed rental income-- subject to the rules explained in chapter 1 of Pub. 535, as miscellaneous itemized deductions on Schedule A, line 23, using the tiered application of expenses (Cat 1: Interest, taxes Cat 2: Insurance Condo Fees Cat 3:  etc...).   

The loan for the property is for personal use.  I’m not planning on actively renting the property now or in the near future.  We do plan to retire in about six years and will then either A) Occupy the property as our primary home indefinitely or B) Occupy/declare the property as our primary home until we can sell it and buy another (bigger) property in the area.   For this reason, I’m not keen on declaring the property a rental and taking depreciation etc…  which we really can’t do currently based on the ‘personal use’ definition.

We do itemize and our (total) deductions will exceed 2% AGI.  My only goal here is to mitigate the taxes on my daughter’s cost-share/rent monies received by claiming rental expenses.  The condo fee is $300+ a month, so hopefully the tiered approach/ 2% AGI will still provide some valuable offset to the income.
Am I  missing anything?  Thoughts?  Suggestions?