Rental loss

6 Replies

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. 

Wow @Kerrie Carre sorry to hear this. Hope your sister-in-law recovers soon.

Hopefully a CPA will chime in but my thoughts are that you are out of luck. 

You have expenses and no income. That will lower your tax burden but that's no way to operate.

Look into http://www.needhelppayingbills.com/

That's a better way to move forward from a business owner perspective.

Best to you!

Failure to create the Lease is not a Loss and is neither a Lost Rents claim on your insurance (bad decision any way).  It's the same as a vacancy, also not a loss.

Hey @Kerrie Carre and welcome to BP. 

Let me preface what I am about to say with the fact that I am not a CPA or tax attorney, so take my advice for what it's worth. 

It sounds like you're looking at it as if you lost rent.  But the way I see it, you didn't lose it....you just never collected it. 

For example, IF this was a normal rental property that rented at a fair-market rate for $1,000/month and you only collected two months rent ($2,000), then your income would be $2,000 (minus any allowable expenses).  You wouldn't then subtract $10,000 on top of that for the ten months of rent you didn't collect.  Make sense?

Now, this is where I think it could get tricky.  The reason I said "IF" this was a normal rental property, is because if you rent to a family member at a below-market rate (or no rent at all as in your case), then I believe it is viewed by the IRS as "personal use" of the home and losses are generally not allowed and you are limited to only writing off mortgage interest and property taxes (just like on your primary residence). 

Definitely consult with a CPA or other tax professional to be sure though. 

@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. 

Thanks @Brandon Hall for the clarification. I didn't know the answer...and his is an eye opener. NOT finding fault...but dealing with family can cause unforeseen additional problems. If you move to evict, the could create a real and lasting strain on your familial relationship. No easy answer on that one!

Originally posted by @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. 

 Well put Brandon,  That said I will add in that you should not rent to family.

Keep in mind if it is personal use and you do not have a second home you are allowed to deduct the property taxes on Schedule A. You are also allowed to deduct the mortgage interest on a second home.