If my rental is less than Fair Market Value, what do I do?

[paul-moore]

I am receiving $695 per month on a rental property that appears to have a Fair Market Rent of $934.  What do I need to do?

[DianeW · Accepted solution]

First, check to see if similar properties in your area are rented at or near the rents that you are charging.  If so you should select that you are renting at fair rental value all year.

The IRS has no blanket ruling on below-market rentals to others-- aged tenants and others on fixed incomes, for example, who may need some assistance as fair market values rise.  

Questions to consider would be whether you had difficulty renting it, leaving it empty which would cause concern for burglary or theft.  Consider all the facts and circumstances of your situation. One main question is whether you are renting for profit.  If so, you should proceed to enter your rental indicating that it was rented at fair rental value.

If you decide that you are not renting for profit, you can enter the rental income under Other Reportable Income.

• In the search box type other reportable income > Jump to other reportable income
• Click "No" then Select Other reportable income, then follow the prompts to enter the income.
  

The expenses for property tax and mortgage interest can be deducted on itemized deductions (Schedule A) even if other expenses are not allowed. 

If there is any income from rents after subtracting the mortgage interest and taxes you can take the remainder as a miscellaneous expense subject to 2% of adjusted gross income also on the Schedule A. 

[Michelle883]

I have a client that is renting to a pastor and renting below FMV, the client is wondering if the difference can be written off as a donation?  This is on a fiduciary tax return.  Also, this client is wondering if the donation can be used as a tax credit to help offset his father's tax debt.  The father passed away 3 years ago, so I don't know if this is pertinent or not.

[MJLap]

You cannot claim a deduction without money "exchanging".  So, in your case you could charge and collect the FMV rent and then make a charitable contribution to get back to the target rent.

It is similar logic to reducing rent for the tenant providing a service or paying for a repair.   You have to claim the full rent amount then take the deduction as an itemized expense.   If you are paying for a service provided by the tenant, then the tenant is obligated to report it as income (and for you to deduct $600 or more you would need to file a 1099).