Rents on 1099-MISC from Housing Authority of the Cherokee Nation

[nmms]

My client received a 2022 Form 1099-MISC from Housing Authority of the Cherokee Nation with $4,400 reported in Box 1 Rents. She said this was money the Cherokee Nation paid her for her brother to stay with her while the Cherokee Nation tore down his old house and built a new house. Can I report this income on Schedule E and select Other type of property by entering "HACN Rental Assistance" in the applicable field, and not making an entry in Number of days rented? 

Note that this generates a Suggestion "Schedule E #1: Number of days rented may be required for this rental real estate property.", not a Critical Diagnostic. This also generates a Federal Statement

Statement 1

Schedule E, Part I - (address of property)

Other Type of Property

Type of Property: HACN Rental Assistance

Is this statement sufficient for the Instructions for Schedule E page E-6 to Attach a statement to your return describing the property?

[PhoebeRoberts]

Sounds like a fine presentation to me. 

[nmms]

The taxpayer is not just renting out a room in her home, she is sharing her entire 3 bedroom, 2 bath home with her brother for a period of one year. How do I accurately apportion her expenses to make sure she properly divides any expenses between personal and rental use?

[sjrcpa]

You can't deduct any expenses for shared/common use.

[nmms]

In this case, can any expenses be deducted? The only room in the house that would not have been shared by both of them is one bedroom and perhaps one bathroom.

[BobKamman]

Is the house on the reservation?  Are the taxpayer and her brother enrolled members of the Cherokee Nation?  

[nmms]

The taxpayer and her brother are enrolled members of the Cherokee Nation. The taxpayer's house is not on the Cherokee Nation Reservation.  

[PhoebeRoberts]

Ah, I assumed you hadn't planned to deduct any expenses, and just wanted to avoid a mismatch notice. If there are any rental expenses (and I agree that only the exclusive-use areas would count), then you also have determinable days rented.

[nmms]

I was looking for a way to avoid determining how much depreciation can be deducted only on the part of the house used for rental purposes in 2022, a house that was only used as the taxpayer's personal home several years before 2022 and will only be used as the taxpayer's personal home after 2022.

[BobKamman]

Are you sure about that?  Pub 527 says, 

Used as a home and rented 15 days or more. If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Because you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use . . .

But the question here is whether there is profit motive.  Otherwise, the deductions would be miscellaneous on Schedule A, but not allowed until 2025.  In reality what is happening is that the owner is being reimbursed for part of her expenses for taxes, insurance, utilities, maintenance and repairs, so the payments are not taxable.  That argument might succeed with IRS or Tax Court, but it would be hard work.  

[nmms]

The Housing Authority of the Cherokee Nation reported $4,400 on Form 1099-MISC in Box 1 Rents. Arguing that the owner is being reimbursed for part of her expenses for taxes, insurance, utilities, maintenance and repairs, so the payments are not taxable would be difficult.

[BobKamman]

As I wrote, it would be hard work.  

[nmms]

What is my responsibility as a tax preparer when the taxpayer doesn't provide any information to determine the part of the property used for rental purposes and the part of the property used for personal purposes and says "Do whatever as long as I don't have to give receipts"?

[PhoebeRoberts]

Income is taxable unless there's a rule that says otherwise. Deductions are only allowable if you have records to substantiate them. "I don't care what the tax answer is" is an easy, easy client!