rent a room to friend at less than fair market price?

Forum|Forum|2 years ago
March 3, 2024
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Hi here,

i have a question that i rent a room to a friend in my primary residence house at a few hundreds less than fair market price for 6 month, because he is new to the area and was not be able to find a room at the time, so it is kind of a help. so the question is do i need to report this income in tax return?

Best answer by Cynthiad66

If you rent your property below fair market value, the IRS considers that you do not rent your property to make a profit. In this case, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

@tututu

Mike9241

based on a court case Jackson, TC Memo1999-226 the answer is yes unless you can make a good argument that the rent only covered additional out-of-pocket expenses, ie cost sharing. Hard to prove. don't report on schedule E but as misc income not subject to SE tax.

the court case in brief: rented at less than FMV to parents (wouldn't matter if they were friends and not family). all use was deemed personal use thus no rental expenses (Schedule E) were allowed (deduction for interest and taxes were allowed on Schedule a) and the taxpayers had to include the rent in income.

tututuAuthor

@Mike9241 , thanks, so it means if rent under fair market price it is the worst that we had to report the rent as regular income and expense cannot be used to offset it VS if rent at fair market price that the rent income maybe offset by rental expense, which may be a negative number that does not increase taxable income. my understanding is right? thank you/