You may have a property that you decide to rent out at less than fair market value, perhaps to help out a family member or friend. How you report the rental income and expenses for tax purposes depends on whether the property is considered a secondary home or a rental property, and whether you rent out the property with the intent to make a profit.
According to the IRS, if you are renting a property without the intent to make a profit you can deduct rental expenses up to the amount of your rental income. You could not deduct a loss in the current year and could not carry forward a loss to subsequent years.
If you are not renting out the property to make a profit, you would report the rental income as other income on your tax return (line 21 of Form 1040). If the property is your main home or second home you could deduct your mortgage interest, mortgage insurance premiums and real estate taxes as itemized deductions on Schedule A. Other expenses associated with the rental could be claimed as miscellaneous itemized deductions to the extent they exceed 2% of your adjusted gross income.
If you have a property that you use for personal purposes and also rent out at fair market value, you would need to allocate your expenses between personal use of the property and rental use. According to the IRS, if you rent out a dwelling unit to anyone at less than fair market value, that period is considered your personal use of the property.
If the personal use of the property is more than 14 days or more than 10% of the number of days it was rented at fair market value, whichever is greater, the property is not considered a rental property. Since rental at less than fair market value is considered personal use, if that rental period is more than this personal use threshold, the property would not be considered a rental property. In this case, as explained by Lauren Baier Kim in an article in The Wall Street Journal, the property would be considered a secondary home. You would report the rental income on your tax return and could claim a deduction for rental expenses up to the amount of the rental income.
If the property is your main home or a second home, you could still qualify to claim the itemized deductions for home mortgage interest, mortgage insurance premiums, and property taxes.
You may also want to take into consideration the state income tax consequences. Your state may have a renter’s credit, which could reduce the state income taxes for the person renting your property based on the actual amount of rent paid. As the landlord, you would generally have to provide, or sign some type of certificate stating the amount of rent paid during the year.
Lauren Baier Kim, Tackling Tax Questions About Vacation Homes, The Wall Street Journal
Publication 527, Residential Rental Property, IRS
26 USC §280A Disallowance of Certain Expenses in Connection with Business Use of Home, Rental of Vacation Homes, Etc., Cornell University Law School