rental house?

[grandmabee]

Taxpayer buys a house in different town. Daughter is going to college and its a 4 bedroom home.. They will be renting out 3 of the other bedrooms to other students. So 75% rental and 25% for daughter who is not paying rent. Can this be a rental at 75% or does this fall into the vacation home because its used more than 14 days or 10% of days rented as personal use.

Any help

[Bart]

Taxpayer buys a house in different town. Daughter is going to college and its a 4 bedroom home.. They will be renting out 3 of the other bedrooms to other students. So 75% rental and 25% for daughter who is not paying rent. Can this be a rental at 75% or does this fall into the vacation home because its used more than 14 days or 10% of days rented as personal use.

Any help

Have the daughter pay rent even if the parents give her the money.

[jainen]

>>Have the daughter pay rent even if the parents give her the money. <<

Bart, can you cite any authority for parents treating their daughter's use of the property as a rental with money they indirectly pay themselves? It seems to me like an arrangement primarily motivated by tax-avoidance.

[grandmabee]

>>Have the daughter pay rent even if the parents give her the money. <<

Bart, can you cite any authority for parents treating their daughter's use of the property as a rental with money they indirectly pay themselves? It seems to me like an arrangement primarily motivated by tax-avoidance.

I'm looking for the correct way to handle it

does it fall under vacation home? or would I claim rent on line 21 and expenses on A misc sub to 2%

would the interest be under interest?

after talking more to the client the pmt is 1400 and rent collected will be 300,300,300= 900

profit motive? I think no

[kcjenkins]

Sure there is a profit motive. Many rental properties take years to reach a positive CASHFLOW but are still good business investments. Stop looking just at the cash flow and consider the whole picture. The appreciation in value of the property is also part of that picture, and even if there is a current temporary downturn in real estate, that is not going to last long.

Treat it as a rental, IMO, at 75% There are examples in the IRS Pub that should help you.

[joanmcq]

KC, the trick to rentals IS to have positive cashflow even if you have a tax loss. I think the daughter's use of any areas makes it personal. Like a B&B, the only areas they can claim as rental are the three bedrooms not being used by family.

[RoyDaleOne]

First from 280A:

(A) IN GENERAL

A taxpayer shall not be treated as using a dwelling unit for personal

purposes by reason of a rental arrangement for any period if for such

period such dwelling unit is rented, at a fair rental, to any person

for use as such person's principal residence.

Therefore, have the daughter establish the house as her legal residence, and pay the same amount of rent as the other tenants.

Otherwise, there are two or more additional options:

1. Take the position that 75% of the house is rental property, counting only the bedrooms, if of a similar size.

Or some variation that results in a portion of the house is being rented.

2. Take the position that everyday of use by the daughter is a "personal use day" and apply the vacation rental rules.

This is a common situation with children who are college students living off campus. I would suspect that there is a cottage industry supporting this type of activity in most major college towns.

[kcjenkins]

I usually do, in such situations, encourage the child to pay fair rental value, then the entire house is rental property. It is perfectly legal, as long as the parents follow through on the details. And buying such a house is often the start of people making some nice money out of getting into rental property. The second most common route into RE investing, after renting out their own former residence. After all, you get some tax deductions up front, then a LTCG when you sell, and this is often the only 'tax-related' investment that many people ever make.

[RJM]

A new client is a 1/3 partner with his son and another student with one of these transactions. The cool thing is I think the 2 boys can split the $8000 homebuyer credit, but they must commit to stay in teh house for a while (I think 3 yrs?, still working on setting up the books). The boys fixed up a junker house for their capital contributions, and the new client (dad) put up the cash for the down payment. The boys are renting out several rooms to students and expect to make profit right away.

[Julie]

It's not a vacation home. Vacation home rules do not apply to this situation, and don't make sense here. Like several people have said already, it's a regular rental of 75% of the property. Claim 75% of all expenses as rental expenses. Including the interest. Put it all on Sch E like normal, but only 75% of it. The remaining quarter of interest and taxes can go on the A--personal use.

But some other considerations come to mind: Is the fair market rental of the house more than 1200? If they're charging below 3/4 market rent, why? Daughter's friends? There are some loss limits on rentals below market value. Pay attention.

Are they charging enough rent to make this project make sense in the short term (that is, how much of a short-term loss are they taking?) If that's $1390 of interest, plus $250 utilities, plus property taxes and repairs, against $1200 rental value, this might require some thinking. (I'm assuming the daughter's portion is worth another $300, not that she's paying it, but that's a value the parents are receiving in not having to rent her a room elsewhere.)

At that point, you have to consider investment value, as KC mentioned. Is the value of the property in the future going to make it worthwhile? In some areas, maybe. In others, not.

I'm looking for the correct way to handle it

does it fall under vacation home? or would I claim rent on line 21 and expenses on A misc sub to 2%

would the interest be under interest?

after talking more to the client the pmt is 1400 and rent collected will be 300,300,300= 900

profit motive? I think no

[jainen]

>>it's a regular rental of 75% of the property<<

The percentage that can be considered rental only includes areas of the house that are used exclusively by tenants, presumably just the rented bedrooms themselves. The bathroom, kitchen, garage, or any other area used partly by the daughter can not qualify as rental, so it is unlikely to reach 75%.

[RoyDaleOne]

You could argue that you could remove the common areas from the equations altogether. Using only the exclusive use areas.

Something like 120 sq ft / 480 sq ft. ( four 12 x 10 bedrooms )

You can use any reasonable method to allocate.

Just be ready to defend the allocation as reasonable.

[jainen]

>>You could argue that you could remove the common areas from the equations altogether.<<

Could you base that argument on some code section or ruling?

[kcjenkins]

Actually, it might even make sense to treat the daughter as the 'manager', with her room provided as tax exempt income to her for her services managing and caring for the property, interviewing new tenants, collecting rent, paying bills, etc. Then no problem with the B&B rules, either. Of course, this assumes that the daughter is actually doing those things, and that no doubt varies from person to person.

I don't agree that you could just remove the common areas from the equation, because there are too many cites that conradict that option.

[RoyDaleOne]

Could you base that argument on some code section or ruling?

Yes, I can.

[jainen]

>>Yes, I can. <<

Okay, but meanwhile kc has upped the ante with "too many cites." Now my question is, can you support it with rulings that offer at least a one in three chance of success? (That's the current standard for practitioners under Circular 230.)

[RoyDaleOne]

Too lazy, here is a web page.

http://www.roseburgaccounting.com/monthly/FEB06.htm

[jainen]

>>Too lazy<<

Hoo, boy, that's a doozy of a citation. Not a single dang tax authority therein, unless you count Form 8829 (ignoring any inconvenient instructions and the words on the form itself). Instead of relying on the regs and case law, this guy justifies an individual's tax accounting in terms of a non-profit corporation's GAAP or cost accounting for grants. At least to my thinking, that's too big a stretch.

As for "approximates the number-of-rooms method," his theory does not match the applicability, the methodology, or the result of the IRS calculation. Why, he says as much himself!

[RoyDaleOne]

Proposed Reg. Section 1.280A-2(i)(3) provides that a taxpayer may determine the expenses allocable to the portion of the dwelling unit used for business purposes by any method that is reasonable under the circumstances.

Please, note any cautionary comments I have made is that it must be reasonable, and it is only an argument.

Therefore, if the method used is reasonable under the circumstances it may be used to allocate the expenses.

Heck, make the daughter an employee and go for Section 119, if I recall correctly.

[joanmcq]

Only problem is that the B&B allocation is a court ruling. Pretty substantial authority for not allowing ANY common use areas as business.

[Julie]

Okay, I know I was being sloppy above by making it 75% (although the varying room dimensions are still an unknown). I didn't intend to suggest ignoring other aspects of the law which might make for a different percentage, but presenting a way to apply the percentage.

With the facts given, I agree with Joan and jainen that the common areas must be excluded.

Only problem is that the B&B allocation is a court ruling. Pretty substantial authority for not allowing ANY common use areas as business.

[RoyDaleOne]

If the daughter does not pay fair rental value I would suggest that the vacation home rules apply, because, every day of use by the daughter is a personal use day, is it not? Unless, she pays fair rental value.