Rental arrangements

[chess999]

I am wondering about the tax implications about 2 potential renting scenarios:

1) 1 family member rents their house to another family member at a below fair market value rate. Lease is involved

2) same scenario as above but it's done without a lease and on a "pay what you can" basis (person renting the place is unemployed and trying to get back on their feet)


In neither situation are any rental expenses deducted by the family member that owns the house.

Is the rental money received in either of these scenarios counted as income by the family member that owns the house? Or is it considered like a gift (because payment of rent is optional basically) with no tax due?

Thank you for possible insights.

[mwcpa]

these arrangements can cause be tricky and have complicated results... seek the counsel of a qualified tax advisor as the consequences for treating it wrong can be costly...

Thanks to RIA from where I am paraphrasing....

The home could be deemed a vacation home since personal use of the home generally includes use by a family member (brother, sister, spouse, ancestor, or lineal descendant). This is true even if the family member pays a fair rental price. However, a family member's use is not attributed to the owner if the family member pays a fair rental price and uses the dwelling as a principal residence.

Examples
1. A owns a house that he rents to B (A's son), B has no ownership interest in the property, uses it as his principal residence, and pays A fair rental price for the property.

Under IRC Sec. 280A(d)(3), A use of the house is not considered personal use by A because B uses it as a principal residence, he has no interest in the property, and he pays a fair rental price. The house is considered a rental property, so any rental loss incurred is deductible by A, subject to the hobby loss, at-risk, and passive activity loss rules. The vacation home rules do not come into play.

2. A rents the same house to B, now at less than a fair rental price. B uses the house as her principal residence.

In this situation, A is considered to use the house for personal purposes on the days B rents the property because B pays less than a fair rent. The rent house is thus considered A's vacation home under IRC Sec. 280A so rental deductions are subject to income limitations.

There are also possible gift tax issues to be concerned about.

[Taxman10]

MW - in the OP, scenario #1 - if the owner was renting the house at below FMV by $1,000, but filed a gift tax return to show the gift of $12,000 would that help the situation or not?

So the FMV rent would be $1500/mo, but the renter is only paying $500 and the landlord is gifting $1,000/mo??

thanks!

[commentator]

Without looking anything up, there is an exception for related party rentals when the related tenant is making the place his primary residence. That along with the issue raised by Taxman10 is all the more the OP to consult face-to-face with a tax pro.