Sublease

[taxdan]

Client rents and lives in a house.

Client takes care of elderly unrelated disabled person who also lives in house and pays rent.

City is paying part of elderly person's rent under Section 8, but the checks went to my client who in turn, paid it to the landlord. Of course, the 1099-MISC showing rental income went to my client.

I told my client to have the city pay the landlord directly in the future, but for now, can I just claim this income on a sch E and write off an equal amount of rent paid as expenses? And of course, if I put it down as not for profit rent, the whole amount will flow to 1040 line 21 and tax will be owed on it.

Any input is greatly appreciated!

Dan

[indyscott]

http://www.irs.gov/publications/p527/ar02.html#d0e1413

Above reference is to IRS, pub on rentals. I'm not sure why, but they seem to want the income reported on line 21, and the expenses on Sch A, but only so much of the expense as to not incur a loss.

If their intent is to pay attention to profit vs loss, I don't know why they don't just have it all put on Sch E, and have a check box for "is u is, o' is ain't fo' profit", and prevent any loss from flowing onto the 1040 gross income.

[taxdan]

http://www.irs.gov/publications/p527/ar02.html#d0e1413

Above reference is to IRS, pub on rentals. I'm not sure why, but they seem to want the income reported on line 21, and the expenses on Sch A, but only so much of the expense as to not incur a loss.

If their intent is to pay attention to profit vs loss, I don't know why they don't just have it all put on Sch E, and have a check box for "is u is, o' is ain't fo' profit", and prevent any loss from flowing onto the 1040 gross income.

I completely agree with you Scott. Taking the deductions on the A would not benefit my client in this situation. He does not own the property, so there is no interest or taxes to write off. Taking them on the E would be much easier. Oh well.

[jainen]

>>a check box for "is u is, o' is ain't fo' profit"<<

Even if it is for profit, a loss can't be deducted for renting a room within your own home. That's because Section 280A, business use of home, applies to rentals too.

[taxdan]

So, in my situation listed above, since the client does NOT own the house (pays rent), and received the 1099-MISC for rental income, is his only option to claim the income on line 21 and take no dedcutions for it?...even though he just hands the money over to the landord?

[jainen]

>>his only option to claim the income on line 21 and take no deductions for it?<<

Don't be like that. He can put ALL his expenses, including a share of utilities and maintenance (generally prorated by square footage) on Schedule A. Enough to write off the entire 1099 plus the rent paid directly by his tenant (subject to 2% AGI limitation, just like any other not-for-profit activity or investment). What other option would you prefer?

[taxdan]

>>his only option to claim the income on line 21 and take no deductions for it?<<

Don't be like that. He can put ALL his expenses, including a share of utilities and maintenance (generally prorated by square footage) on Schedule A. Enough to write off the entire 1099 plus the rent paid directly by his tenant (subject to 2% AGI limitation, just like any other not-for-profit activity or investment). What other option would you prefer?

Sorry. As is often the case on the message board, not all details given.

Rent collected by client from the city and handed over to the landlord is less than $4K. NO other deductions because elderly person pays own share of utilities and maintenance. Client has no other itemized deductions (no mortgage interest or property taxes), so standard would be higher. Client in 25% Fed bracket so I didn't want him to have to pay an extra grand in taxes. I was just hoping I could claim rent collected on E and write off same amount paid to landlord. Once again, wishful thinking on my part.

[jainen]

>>standard would be higher<<

That says it all. He is NOT paying an extra grand--he deducts even MORE than his actual expenses!

Still, there is room for improvement. Talk to the property owner about a new, joint rental agreement; he will probably be interested in the guaranteed county money.

[taxdan]

>>standard would be higher<<

That says it all. He is NOT paying an extra grand--he deducts even MORE than his actual expenses!

Still, there is room for improvement. Talk to the property owner about a new, joint rental agreement; he will probably be interested in the guaranteed county money.

Thanks Jainen. I think you're getting loopy like I am! It's time for me to go to bed!

[Don in Upstate NY]

How about the procedure used when a 1099-MISC doesn't properly reflect income?

Line 21 (item 1) Rent received as nominee $ 4,000

Line 21 (item 2) Rent paid to actual landlord ( $4,000 )

[michaelmars]

Don got it right - ssssh guys, you work for your clients not the irs. Dons is a reasonable and defendable presentation. Simply 2 roommates where the county paid the rent cks to the care giver. Remember Substance over fact stuff you learned? The intent was not to stick the nice guy with a huge tax bill!

[taxdan]

I like it! Thanks guys. That's what I'm going to do. Line 21 it is.

Pssst. I wasn't going to have him pay the tax anyway. I was just going to do it wrong by putting it on the E and taking the expense. But I like this way better.