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Old 03-29-2012, 02:41 PM
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Sch A vs Sch E for below market rent on rental property

My in-laws bought a home in Florida to live in during retirement. My father-in-law passed away and they never moved into the new home. My mother-in-law continues to pay the mortgage and all the expenses (utilities, water, etc). One of her sons & his wife are living in the home and paying rent (which is less than the market rate for rentals in that area). Can this home be written off Sch E as a rental property or is it written off on Sch A as a vacation home. My mother-in-law has never visited the home. If her son wasn't there, she would be renting it out for market value.



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Old 03-29-2012, 07:29 PM
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“My in-laws bought a home in Florida to live in during retirement. My father-in-law passed away and they never moved into the new home. “My mother-in-law continues to pay the mortgage and all the expenses (utilities, water, etc). One of her sons & his wife are living in the home and paying rent (which is less than the market rate for rentals in that area).”----> Your in-laws bought the home in FL but they pay rent to your MIL????? And your MIL continues to pay the mortgage and all the expenses????? Is the mortgage held in your MIL’s name???? If your MIL’s name is on mortgage but not on the deed,then, your MIL can deduct the mortgage interest expenses that she pays. The mortgage interest deduction is claimed on schedule A of Form 1040 line 10. To take a deduction for mortgage interest or property taxes your MIL must both be legally obligated for the payments and make the payments. Unless your MIL actually paid the mortgage interest and property taxes, she may not deduct them either. If your in-laws live in the home that in-laws(another , I guess) purchased but are neither on the deed nor the mortgage then they may not deduct anything at all.
“Can this home be written off Sch E as a rental property or is it written off on Sch A as a vacation home. “---->The only way that anyone can deduct anything in this situation is if you rent the home to your in-laws, the son and his wife. They are just tenants anyway so you might as well do it legally so that you can deduct the rental expenses including the mortgage interest and property taxes. You MUST make sure that the rent you charge them is market rate, however, to preserve your deductions. If the mortgage payments are significantly less than the fair market rental value you won't be able to deduct anything beyond the actual rents received on Sch E of 1040.Then, you can only deduct expenses, r/e taxes or mortgage expenses as long as you pay on Sch A; ALSO, While the IRS hasn't been auditing heavily for this--the rent would need to be more than $1,084( annual gift tax exclusion for 2012 is $13K;$13K//12=$1,084) a month to create a gift tax issue . I mean, say, fair market rent in the area is $3K a month but say you charge them $500 a month , then the amount of gift is $17K;$3K*12-($500*12)-$13K=$17K, then you need to file the gift tax return form 709 with the IRS( though you do not pay gift tax until your cumulative gift is $5miliion for 2012).
“My mother-in-law has never visited the home. If her son wasn't there, she would be renting it out for market value.”---->Then assume that your MIL’s name is listed on the deeds and mortgage , then she can deduct expenses on Sch E and(or) Sch A, depending on the situation.


Last edited by Wnhough : 03-29-2012 at 07:33 PM. Reason: to correct words


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