Rental Property Tax Question

[IROC]

So…to facilitate the move of my in-laws up to East TN, we bought a house (had it built, actually) and now “rent” it to them. They are financially challenged, so what they pay us in rent is less than the actual mortgage payment.

In this first year of dealing with the tax implications of this, is it really considered “income” if I am not making any money? It doesn’t to me since if their rent payments to us are going to be taxed as income, I would be better off letting them live there for free.

Thoughts on this?

[IROC]

If the forums ever recover - never mind - I found the answer to my question. I'm actually better off than I suspected...

[Tobra]

You rent it at a loss to them and write the loss off on your taxes

[BK911]

Save all your home depot receipts.
Deduct all expenses including tax, interest, insurance, repairs, etc...

[Tobra]

Also, pay yourself a nice management fee, you deserve it. It will be an expense on the property and income for you. I think 10% is pretty standard.

[Steve Carlton]

Originally Posted by BK911

Save all your home depot receipts.
Deduct all expenses including tax, interest, insurance, repairs, etc...

And depreciation.

[Seahawk]

Originally Posted by IROC

If the forums ever recover - never mind - I found the answer to my question. I'm actually better off than I suspected...

What did you find out?

There are lot of options. I am curious.

[aigel]

You have to be careful. You cannot rent it out significantly below market value and take a big loss on your taxes. I know this because TurboTax will ask you how you determined rental price and if it is within market range.

[IROC]

Originally Posted by Seahawk

What did you find out?

There are lot of options. I am curious.

Being an engineer and not a tax guy, I assumed things like mortgage interest and property taxes, etc. would be itemized along with the rest of my “personal” deductions, and that the rent I receive would be viewed as pure income on top of my wages.

But, what I found is that this rental stuff is handled separately on a 1040 Schedule E and rental income and the deductions allowed (stuff like mortgage interest, property taxes, HOA dues and even depreciation) are all tallied right there. Assuming I navigated the depreciation rules correctly, it appears that I am actually in the position of taking a minor loss.

I will also point out that I despise this game the IRS seems to play where they make it difficult and treacherous to try and do the right thing. I literally spent probably three hours Saturday reading publication X and worksheet Y…. Crazy.

[aigel]

Originally Posted by IROC

Being an engineer and not a tax guy, I assumed things like mortgage interest and property taxes, etc. would be itemized along with the rest of my “personal” deductions, and that the rent I receive would be viewed as pure income on top of my wages.

But, what I found is that this rental stuff is handled separately on a 1040 Schedule E and rental income and the deductions allowed (stuff like mortgage interest, property taxes, HOA dues and even depreciation) are all tallied right there. Assuming I navigated the depreciation rules correctly, it appears that I am actually in the position of taking a minor loss.

I will also point out that I despise this game the IRS seems to play where they make it difficult and treacherous to try and do the right thing. I literally spent probably three hours Saturday reading publication X and worksheet Y…. Crazy.

That would have easily paid for a copy of turbotax.

[Bob Kontak]

Originally Posted by Tobra

You rent it at a loss to them and write the loss off on your taxes

You can probably take the loss against other rental income.

No way will the gubment allow you to crash that loss against your day job income.

[aigel]

Originally Posted by Bob Kontak

You can probably take the loss against other rental income.

No way will the gubment allow you to crash that loss against your day job income.

They do allow it, up to 25k if you make 100k or less. It fades up to 150k, if you make over 150k, you only can use it to offset other rental property income.

https://www.stessa.com/blog/passive-activity-limits-passive-losses/

[Bob Kontak]

Originally Posted by aigel

They do allow it, up to 25k if you make 100k or less. It fades up to 150k, if you make over 150k, you only can use it to offset other rental property income.

https://www.stessa.com/blog/passive-activity-limits-passive-losses/

That hurts my head a little to read and I passed the CPA exam first time I sat for it in 1983. 4% of test takers do that. Not bragging, just saying that I'm fading like a Bowse.

[jhynesrockmtn]

You can take schedule E losses to reduce taxes to certain limits. If you have too much in one year, it builds as prior year losses. You need to be careful with how much below market the rent is and I don't know if you can "pay yourself" a management fee, I don't believe so. Consult a CPA once on how to set this up properly if you want to prepare the return yourself. If you find the right person, they'll review the return for you rather than having to do the whole thing. I was a CPA in a prior life and pay someone $750 to $1,000 a year to do our taxes. We have a small apartment building and a diverse investment/retirement account. It's so worth not worrying about whether I'm screwing up the return. Plus it took me 5 tries over 5 years to pass the whole CPA exam, so not that smart :-)

[look 171]

I thibk its time to talk to your CPA. They have all updated info. I don't think you can pay yourself management fees neither. Do it right and it will cost you little compared to fines and such. Its time.

[Tobra]

Why is it you can pay someone else to manage it, but you can't pay yourself to do the same work? It is money coming out of the rental income. I guess logic and tax law don't belong together.

[fintstone]

If you rent out the property to a relative and do not charge fair market rent, the IRS will not recognize the property as a rental...and you will not be able to write off expenses. It must be treated as a personal residence (like a vacation home).

You will not be able to deduct rental type expenses like maintenance, repairs, insurance, utilities, cleaning, depreciation, etc... just like with your personal home (it is treated like a personal home any day it is rented out at less than market value).

You noted that you charged less than the mortgage. That does not mean that you are not charging fair market. Sometimes when rentals are first put into service there is a significant loss for years.

If you rent below market value, you can still claim property taxes and your mortgage interest for the rental as a secondary property (if you don't already have a vacation home).

[IROC]

We are renting it for close to fair market value, but we financed the house on a 15 year mortgage and the rent income comes in slightly less than our payment. That detail is interesting, though. I didn't realize that. Also, I have no nefarious plan to use losses to offset other things on my taxes. We're talking less than $2k in "losses", IIRC.

I don't plan on paying myself a management fee. I am chronically and terminally ethical and actually am just trying to do the right thing.

[fintstone]

The fact that you did a 15 yr mortgage would make it near impossible to get the mortgage on a new home in rent...so you should be fine. Just document how you determined fair market value in case you are ever audited. If it is close, you should be ok.

You should also consider how long you intend/expect to rent the property and what you expect to do with it afterwards as those tax implications have consequences as well. If you rent it, your basis will decline every year due to depreciation so you will pay taxes on a larger amount of capital gains when you sell. If you consider it personal use, you can still write off mortgage (up to $1M in total mortgages including your personal one unless you have another "second" home already) and taxes.

[MBAtarga]

Originally Posted by Tobra

Why is it you can pay someone else to manage it, but you can't pay yourself to do the same work? It is money coming out of the rental income. I guess logic and tax law don't belong together.

I would say reason being if you "pay" yourself, that is taxable income to you. Why would you want to take a deduction against rental income to then have to pay income tax and ss tax, etc on that same amount. Your taxes would actually be higher.