Rental loss

[Kerrie Carre]

My husband and I own 6 rental properties. His sister and 3 children moved into one fully intending to pay rent. However she fell ill, lost her job, and has not paid but a few months rent this year. Of course my question is how can I write this loss of rent off on my taxes?

I did look a bit into the "passive loss ("PAL") rules" but I'm not exactly sure how this works. Any incite into this would be greatly appreciated. 

[Brandon Hall]

@Kerrie Carre You may be able to deduct the loss if you move to evict and do so in a timely manner. With the holidays coming up, that's probably not a good idea.

The problem is, when renting to family, you need to treat it as an arm's length transaction. You need a legitimate lease, you need to be charging a fair market rate for the rental, and you need to move to evict if you fail to receive payment. If you treat it like a rental, it's a rental and you can deduct the associated expenses. 

If it becomes a personal use property (which it sounds like it has) you may have some really big problems. This can have a big impact on your tax position, and also exit strategies. For instance, a lot of your deductions will disappear and you will no longer be 1031 exchange eligible. And if you go ahead and report it as an investment property on Schedule E anyway, and the IRS audits you and finds out it was a personal use property (which it sounds like it is), you had better have some money saved up for penalties and interest. 

Everyone above me is correct in what they were saying. The real answer to your question is that you cannot deduct unpaid rent unless you are an accrual basis taxpayer and you had already included that rent in a prior year's income. When you are a cash basis tax payer uncollected rent isn't included it in your income so you can't deduct it.