Not for profit rental property

[Fonzie70]

What is the name of your state (only U.S. law)? Massachusetts

We have rental property, a 1bedroom bungalow, that we have rented it out since 1984. The old tenants moved out in2003 and our son moved in during 2004. I never heard of "not for profit" rental property so charged him a fair rent. Except for one year we always showed a profit. In 2013 he became very ill and lost his job and now his unemployment has run out. Since he has no income and his savings nearly nil, we are looking at not charging him rent and just paying the taxes and insurance ourselves. Can I convert a profit to nonprofit? Will I trigger anything? Will the IRS have any issue or is our only concern if we were to sell the property and, from, what I read, recapture depreciation and treat as ordinary income? Thanks for any advice

 

[FlyingRon]

Hopefully you were submitting your taxes and taking depreciation deductions while you were using it for a legitimate rental. If you were renting you were required to depreciate it and when you sell it you will be required to recapture that (even if you didn't take it). It's not ordinary income but rather a special "recapture" rate (but it's pretty close to that).

"Non profit" isn't really the right word here. But you are correct you don't have to have the property as a rental business. You're free to allow your son to live there or pay less than market rent. However, your tax treatment is different. You no longer can depreciate it and your expenses aren't deductible as a business expense (of course your rental was likely a passive activity anyhow so that was limited to the rental income anyhow). You can likely still deduct the property taxes. If this qualifies as a second home you can possibly deduct the mortgage interest paid as well.

 

[davew128]

Oddly enough, I'm dealing with an audit now where a co-owner of a rental property "paid" the rent of the son living there from their own separate account into the "joint" rental account. Needless to say both the auditor and I have had a hard time explaining that it wasn't rental income and that the period of time counts as personal use, even though there was a lease with a FMV rent charged. I think it took ME an hour to explain to the client in terms they understood that if the kid (or some other unrelated source) didn't pay it, it wasn't rent.

Worst part of the matter is that my client was the OTHER co-owner, and this wasn't their kid but under the attribution rules it counts as personal use against them too.

 

[Fonzie70]

Thanks for response

Hopefully you were submitting your taxes and taking depreciation deductions while you were using it for a legitimate rental. If you were renting you were required to depreciate it and when you sell it you will be required to recapture that (even if you didn't take it). It's not ordinary income but rather a special "recapture" rate (but it's pretty close to that).

"Non profit" isn't really the right word here. But you are correct you don't have to have the property as a rental business. You're free to allow your son to live there or pay less than market rent. However, your tax treatment is different. You no longer can depreciate it and your expenses aren't deductible as a business expense (of course your rental was likely a passive activity anyhow so that was limited to the rental income anyhow). You can likely still deduct the property taxes. If this qualifies as a second home you can possibly deduct the mortgage interest paid as well.

Thanks for the feedback. Yes, yes, taking depreciation since 1984. My plan is: effective Jan 2015 when I will allow our son to live there, rent free, and I will not file Schedule E in 2016 (for 2015). I will claim no deductions (there is no mortgage and I will not have enough to itemize deductions). We just want to help him during his illness and long period with zero income. What I fear, is that somewhere, deep in tax law, there is some rule that he would have to pay taxes on some rule that the value he received for no rent is taxable to him or that I cannot arbitrarily decide I no longer want to consider the property as rental. I surely don't want to find myself in audit in a few years, owing big $$ because I don't know the law. For example, is there any rule that once I discontinue treating the property as rental It "triggers" an event requiring recapture of depreciation. Just so complex.

 

[davew128]

You're over thinking this. You're giving him a GIFT of the value of rent. Thats it. Nothing else matters until and unless you rent it again or sell it.