Fair Market Rent
Robb
NOT be able to deduct any losses against the rental income
because I was charging less than 'fair-market value' for the
property.
However, I am renting it out to a family member and was told
that I could discount the rent up to 20% and still be able
to deduct losses.
I was told that 'Tax Court Memo 1983-411" (?) thus allows
this. However my tax advisor thinks I'm in the wrong.
Could anyone shed some light on this ?
Thanks in advance,
~~Robb
Richard B. Gardner
The Tax Court case you are citing is Bindseil v. Commr. In
a nutshell, Bindseil rented a house to his parents at less
than FRV with the understanding that his parents would make
capital improvements to the property while they lived there.
Bindseil was unable to carry his burden in showing that the
rental payments and capital improvements amounted to Fair
Rental Value of the the property. Bindseil lost. Don't
hang your hat on this one.
--
Richard B. Gardner, EA (OK)
rb...@mindspring.com
Drewremedy
> NOT be able to deduct any losses against the rental income
> because I was charging less than 'fair-market value' for the
> property.
>
> However, I am renting it out to a family member and was told
> that I could discount the rent up to 20% and still be able
> to deduct losses.
>
> I was told that 'Tax Court Memo 1983-411" (?) thus allows
> this. However my tax advisor thinks I'm in the wrong.
>
> Could anyone shed some light on this ?
There appears to be such a decision. I have not read
it--just a summary. Apparently the Court accecpted some sort
of logic that intrafamily rentals were less risky therefore
a slightly lower (20%) rent was still a fair market rent.
Ron Carpenter
> After talking with a 'tax advisor, I was told that I would
> NOT be able to deduct any losses against the rental income
> because I was charging less than 'fair-market value' for the
> property.
>
> However, I am renting it out to a family member and was told
> that I could discount the rent up to 20% and still be able
> to deduct losses.
>
> I was told that 'Tax Court Memo 1983-411" (?) thus allows
> this. However my tax advisor thinks I'm in the wrong.
>
> Could anyone shed some light on this
Well I'm not sure about the memo, but I believe a reasonable
discount would be allowed if you can explain that its worth
something to know: 1)the renter isn't going to trash the
place, 2) the rent will always be paid, 3) that you won't be
changing tenants every few months or even years.
I know landlords that rent to non-relatives for 75% of what
they could get just because they're afraid to ask for the
top dollar. If you're starting real low and then
discounting below that you could have a problem, but if your
really at 80% of the true fair market value I think it
should be allowed.
Ron Carpenter, E.A.
elibortPrairielaw
> After talking with a 'tax advisor, I was told that I would
> NOT be able to deduct any losses against the rental income
> because I was charging less than 'fair-market value' for the
> property.
>
> However, I am renting it out to a family member and was told
> that I could discount the rent up to 20% and still be able
> to deduct losses.
>
> I was told that 'Tax Court Memo 1983-411" (?) thus allows
> this. However my tax advisor thinks I'm in the wrong.
>
> Could anyone shed some light on this ?
Did my answer to you on quicken.com help you?
--
eli bortman
Tax Board
www.prairielaw.com
LoTax
> Bindseil lost. Don't hang your hat on this one.
Yes, taxpayer Bindseil didn't prove to the court that his
parents paid him a "fair rental" as is required, for him to
deduct his rental loss.
But reading the details of the case, you find the "fair
rental" that the court was asking Bindseil to show he had
received was discounted by 20% below the "prevailing" or
"comparable" or "arm's length" or "rented to a stranger"
rental value, because the court found that Bindseil's
tenants were trustworthy, and that he did not have to pay a
management fee on the rental. The court said that 80% of
"market rental value" was a "fair rental" as the term is
used in Section 280A(d)(3)(A), under the facts of the
Birdseil case. The tenants were his parents.
Based on that, I would readily rely on Bindseil to stand for
the proposition that there is a discount allowed from
"market" rental value when the tenant is trustworthy, will
take real good care of the property, and there's no agent
collecting a fee. And that the discount can be 20%. That
is *exactly* what the Tax Court said. And the tenant in
this case was a relative.
Too bad Bindseil didn't charge 80% of market. He would have
won his case.
Robb, check the trustworthiness of your tenant, and whether
you have avoided a management fee/commission, and - if you
meet those conditions - go for it at 80% of market. With
my blessing. But not Richard's.
--
Tax simplification, Army intelligence, Jumbo shrimp. Oxymorons all!
LoTax
Richard B. Gardner
> Robb, check the trustworthiness of your tenant, and whether
> you have avoided a management fee/commission, and - if you
> meet those conditions - go for it at 80% of market. With
> my blessing. But not Richard's.
I'm not really saying either way <g>. I just think Robb
shouldn't rely *strictly* on the Bindseil case, but should
also check out other cases. Unless the circumstances are
pretty much identical, I think it's risky to try and
substantiate your position with just one case.
Ed Zollars
> But reading the details of the case, you find the "fair
> rental" that the court was asking Bindseil to show he had
> received was discounted by 20% below the "prevailing" or
> "comparable" or "arm's length" or "rented to a stranger"
> rental value, because the court found that Bindseil's
> tenants were trustworthy, and that he did not have to pay a
> management fee on the rental. The court said that 80% of
> "market rental value" was a "fair rental" as the term is
> used in Section 280A(d)(3)(A), under the facts of the
> Birdseil case. The tenants were his parents.
Be careful there. Mr. Bindseil produced no evidence but his
own "self-serving testimony" that the fair value was $250.
So the court effectively decided to show that using the only
outside information available (the IRS expert) and giving
Mr. Bindseil every break, he still loses.
The 20% figure originates with an admission by the IRS's
expert (Mr. Lyons) that such a variation was possible.
That's not a finding of law, but rather a factual finding in
this case based on the testimony of the IRS's expert on the
issue at hand. Your attorney's mileage may vary when cross
examining the IRS expert <grin>.
Note that the case cited in the footnote reference where the
court actually holds for the 20% discount (J.V. Keenon, TC
Memo 1982-144) comes to its own conclusions based on the
facts of the case--not that there is a "magic" 20% discount
available to everyone.
So, to "rely" on Bindseil you will need to have expert
testimony to support that the rental you have paid is a fair
rental. All Bindseil establishes is that you could take
into consideration various issues in determining that fair
rental that could allow some movement from the "average"
rental fee, but it doesn't provide blanket protection for a
specific number without evidence to back it up. As Keenon
makes clear, if you want to win this point you need some
evidence (in Keenon, the taxpayer, who won, made a showing
that there was a 10% default rate on rents in the area).
The danger is that someone tries to use Bindseil by taking
his/her "self-serving" estimate of a fair rent and then
reduces that by 20%. Had he "relied" on this case, Mr.
Bindseil likely would have charged $175 to his parents, 20%
less than the "fair value" of $250 he thought he had.
> Based on that, I would readily rely on Bindseil to stand for
> the proposition that there is a discount allowed from
> "market" rental value when the tenant is trustworthy, will
> take real good care of the property, and there's no agent
> collecting a fee. And that the discount can be 20%. That
> is *exactly* what the Tax Court said. And the tenant in
> this case was a relative.
Since no one really challenged the 20% discount (the IRS's
expert allowed it at the outside under examination when he
knew the taxpayer didn't come near that level), I think it's
stretch to say the Tax Court would allow that much in a
disputed case if the IRS presented evidence of a lower
discount. What Keenon and Bindseil make clear is that the
fair value can vary based on the quality of a tenant--but
not that there is a bright line limit.
> Too bad Bindseil didn't charge 80% of market. He would have
> won his case.
I am enough of a cynic to believe that if Bindseil had been
charging $360 per month, the IRS expert would have been far
less willing to testify that "at the outside" a 20% discount
would have been allowable (or that the IRS would have found
a new expert <grin>).
If a taxpayer wants to rely on this line of cases, I would
*strongly* suggest getting a competent outside expert to
both determine the prevailing rate of rent and a rational
basis for any discounts to be claimed.
---
Ed Zollars, CPA (AZ)
ezo...@primenet.com
Ed Zollars
> I'm not really saying either way <g>. I just think Robb
> shouldn't rely *strictly* on the Bindseil case, but should
> also check out other cases. Unless the circumstances are
> pretty much identical, I think it's risky to try and
> substantiate your position with just one case.
The problem with Bindseil is that it's much like the FLP
discount cases--yes, someone may have gotten a 45% discount
in a certain fat situation. But all that tells you is that
the Tax Court will not reject a 45% discount out of
hand--NOT (as some seem to think) that a 45% discount is a
given without any evidence/analysis to back it up.
In this case it looks someone is trying to use Bindseil,
standing alone, to back up taking a 20% discount. And,
frankly, I don't think that's going to stand up in court
unless you can show objective evidence that the 20% applies
in *your* case.
Don't get me wrong--we work with FLPs as part of overall
estate plans, and there are discounts claimed/taken. But
there's more to doing that than simply looking at Tax Court
cases and grabbing a discount figure out of thin air. More
likely, to sustain a position in Tax Court, you need an
outside expert who will testify to why these discounts are
valid.
Similarly, to use the Bindseil logic, you need an expert to
testify both as to what the "average" rent would be and then
objectively demonstrate why you would reduce the rent in
this specific case.
Robb
Thx for all the input. I feel a lot better about my
situation. I will be renting out a house to sister,
brother-in-law, and their family for $850/month.
I'm not sure what the difference between 'fair-market-value'
and average rent for the area, but I've searched the
classifieds and some similar rentals go for between
$950-1150. I've made dated copies of all these, and with
the generous information I've received on this thread, I
'think' I'm in good shape.
If any one thinks otherwise, please reply. I respect any
and all input.
Thx,
~~Robb
Ed Zollars
> Thx for all the input. I feel a lot better about my
> situation. I will be renting out a house to sister,
> brother-in-law, and their family for $850/month.
Query--what objective evidence can you give for offering
your relatives a price that is $100 per month less than what
you've so far been able to determine is the cheapest rent
for similar properties? Because that's what the case you
are relying upon would demand.
So in addition to documenting the prices, I would also
clearly document how you arrived at that $100 "discount"
(or perhaps a larger one if the court sees the $950 as
an aberration).
---
Ed Zollars, CPA Phoenix, AZ
ezo...@primenet.com
http://www.getnet.com/~hmtzcpas
Drewremedy
>> situation. I will be renting out a house to sister,
>> brother-in-law, and their family for $850/month.
> Query--what objective evidence can you give for offering
> your relatives a price that is $100 per month less than what
> you've so far been able to determine is the cheapest rent
> for similar properties? Because that's what the case you
> are relying upon would demand.
>
> So in addition to documenting the prices, I would also
> clearly document how you arrived at that $100 "discount"
> (or perhaps a larger one if the court sees the $950 as
> an aberration).
You might discuss with your advisor putting in some
intentional term in your written lease, you have a written
lease don't you, to"rationalize" a lower rent or at least
create an ambiguity.
For example, a larger than customary security deposit, an
odd term or renewal clause, a FMV rent but a sizeable
discount for PREpayment , a cosigner or some way to
rationalize lower risk/downtime,
Your past rental history for the unit could be helpful/hurt.
If it say vacant for a long time--you might rationalize a
price cut. Conversely if it was rented at $1200 a month
before then $950-100 is going to be a stretch unless you can
defend why. Some neighborhoods do take dramatic
downturns--but can you show it?
I'd collect my ammunition now. Much more credible that
after the fact.