I have a client who purchased a home from his mother. He is not living in the home at present; she continues to live there and is paying him rent at below FMV. He is investing substantial $$ in repairs and improvements.

Rental income from property rented below FMV is reported on line 21 of the 1040 and expenses are claimed on Sch A. Other than interest, taxes and casualty losses, expenses are deductible as misc and subject to the 2% floor.

But - according to Pub 527, the home is considered personal use and therefore none of his expenses ares deductible except mortgage interest and taxes. So if taxpayer is renting to family member below FMV, I would argue that the rental income is not reportable because the property is not considered rental, it is personal. So no income, no deductions other than what is normally deductible for personal property. The rent his mother pays would be considered a gift.

Am I correct?

asked 25 May '10, 10:47

Susan%20K's gravatar image

Susan K
accept rate: 0%

The money my husband earns I consider for my personal use. So then it should not be taxable either right?

A little far-out, but think about it. He is getting rent, she is paying rent. It is taxable to him. If he wants to make other deductions and be able to claim other expenses, then raise the rent. If he does not want to raise the rent, then his deductions are limited.

Helen, EA in PA


answered 25 May '10, 11:00

Helen%20EA%20in%20PA's gravatar image

Helen EA in PA
accept rate: 4%

OK - I see your point. But let's think of it this way. Call lthe money mother is paying a contribution to upkeep. Mother is not paying rent. She is contributing to the mortgage payments and repairs/maintenance. She's already paid taxes on her income.

So to use your analogy - you and your husband have separate checking accounts. You write the check for the mortgage, and he writes you a check for 1/2 the mortgage. Do you owe taxes on the money he gives you? Obviously not...


(25 May '10, 14:52) Susan K

I didn't call it rent, you and your client did. And as such, it is taxable.

(25 May '10, 20:53) Helen EA in PA

I agree with Helen.

The situation is very similar to hobby income vs self-employment income. If you are not in the endeavor for a profit, then your expenses ARE deductible, but subject to the 2% floor.

(There is no gift involved. You may be thinking of the case where an individual loans another money at a below-market interest rate. The forgone interest is treated as a gift to the borrower.)


answered 25 May '10, 12:19

Tom's gravatar image

accept rate: 8%

Hmm. Not sure this is truly "not for profit" - Not for profit is defined in pub 535 as a business or investment activity which is not carried on to make a profit. I'm not sure this is truly a business or investment activity - reading pub 527 - this is personal use of a property. So therefore I would argue it's not business/investment property. Assuming mom is "helping with expenses" not "paying rent", the payments are not income and repair and maintenance expenses not deductible on sch A or anywhere else.

(25 May '10, 14:59) Susan K

Well, first, see Pub 525 page 16. If the client is receiving rent, it has to be reported. If the rent is not enough to cover his expenses before depreciation AND if the rent is below-market, then there's no profit motive. As to whether the payment is rent or not... you would have to evaluate from circumstances. If Mom is paying a fixed amount every month unrelated to actual expenses, it sounds like rent. If Mom is paying the electric bill, perhaps it's not.

(26 May '10, 12:59) Tom

You can argue all you want, that won't make it allowable.

If mom really isn't paying rent, why doesn't he stop collecting it and instead have mom pay for all the repairs and maintenance? He'd get the mortgage interest and taxes and have no income to report. She'd be paying for all the work being done - no problems, right?

Oh wait - payments made to OR FOR THE BENEFIT of another are considered income of the person benefitting from the payments. So mom's repairs would be improving his property and it would still be considered income.

Of course, you could always have him charge mom full FMV rent. That would solve your problem completely. And if your client, and his spouse if he's married, see fit to GIFT mom $13K each, or $26K annually so she can pay the rent to him, then there's no prohibition against that. He'd give her money to pay rent, money he's already paid taxes on, so he can get a deduction for repairs.

Taxes, like the rest of the world, is an "in and out" proposition. In order to take it off some return somewhere, it has to have gone ON some return somewhere. You can juggle and finagle all you want. In the end, he's going to wind up right where he is - no real deductions. On the up side, he has a tenant that he can trust to take good care of the property.

What we haven't talked about is what he paid mom for the property. What is bought at FMV? Is there a gift tax issue on a bargain sale?

And was a QPRT considered? Using a QPRT he could have bought the house at a substantial discount, allowed her to live there for a fixed number of years THEN started charging her rent. He would have postponed the current issue completely.

After the fact planning is no substitute for BEFORE the fact planning - and its certainly seldom cheaper!


answered 25 May '10, 22:04

EAgent's gravatar image

accept rate: 6%

I certainly agree with you about planning! QPRT not appropriate in this case. Thanks for your comments -

(26 May '10, 00:06) Susan K

If instead of rent, he considers the money mom gives him is a gift there is no taxable event as long as the amount is below 13K. Then the repairs are not deductable or reportable until the property is sold and is totally considered personal. However if he wants to deduct the expenses for the repairs and maintenance he needs to raise the rent to FMV. You did not say if he is attempting to treat MOM as a dependant. Ive seen that one tried also it does not work either.

Either he raises the rent or he looses the deductions.


answered 27 May '10, 06:36

EA%20taxman's gravatar image

EA taxman
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Asked: 25 May '10, 10:47

Seen: 23,558 times

Last updated: 27 May '10, 06:36