Where do I put expenses of rental property when rented at less then fair market value?

[bheizer]

In past years you would report the rent income on line 21 of 1040 and put expenses up to rent income under misc itemized deductions subject to 2%.  That is now gone.

Have client that bought a home and is renting to family member way below fmv.

[Terry53029]

if your client is itemizing they can deduct taxes and mortgage interest on schedule a. and rental income as other income

[bheizer]

In the past, you could deduct expenses up to rental income. In my situation client does not have a mortgage and doesn't have enough to itemize.  So assume they have to report income but can't take off expenses equal to income?  Thats a bummer.  

[sjrcpa]

Correct

[bheizer]

Definitely below FMV....parents bought home for daughter and husband to live in while they finish up school.  But to make them responsible, charging $500 per month and house is probably worth $1500-1800 rental value since located in college town.

[itonewbie]

Ah, that's plain as day.  Clearly no profit motive.  So, can't expect much in terms of deduction.  No reason why tax dollars should subsidize their wish to help out the young couple.

[TaxGuyBill · Accepted solution]

Nowhere?

The "misc itemized deductions subject to 2%" is not longer deductible on the Federal return (but it  may be deductible on the State return), so there is nowhere to deduct those expenses, other than the mortgage interest and real estate taxes on Schedule A (and possibly the State tax return)

[itonewbie]

I agree with my friends here.

I would also ask how much lower is the rental compared to market rate and whether there is any good reason for renting it for less if the slightly smaller amount is justifiable, for example, because the there are good reasons to believe that this particular tenant would upkeep condition of the home better than other prospects that may help reduce maintenance costs.

Otherwise, renting the property for less than market value shows a lack of profit motive.  After all, deduction from gross income is only allowed as a matter of legislative grace and not a given.