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For all of last year my ex-girlfriend rented out my upstairs apartment. When we first broke up she talked me into giving her a discounted rent since she was only going to stay "for a couple months." Now she's gone, but I'm trying to do my taxes and saw an option for "fair rental value."

She had claimed, when we were still together and I was buying the house, that I could get $1000/month but she only paid $800/month. I trust her opinion on that since she'd been a landlord and real estate agent for a long time. (I've also confirmed that with a person who helps place people in apartments.)

So would that qualify for not being fair rental value?

The second part of the question is what are the benefits? I know it makes the property "personal use" but not clear on what that means or how it actually affects my taxes...

EDIT: Since it was asked in the comments... I live in Buffalo, NY - Erie County, although I was mostly asking for Federal Tax purposes.

  • You need to note where you live, because tax law differs widely. – ChrisInEdmonton Apr 13 '15 at 14:54
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    Ok, added where I live. – CodeRedick Apr 13 '15 at 15:00
  • Ouch best of luck to you friend. My suggestion would be to cut your losses and start renting it for the correct rate now. Lengthy legal battles aren't cheap. ESPECIALLY when you have shaky claims like "unfair rental value" – Anthony Russell Apr 13 '15 at 15:03
  • @AnthonyRussell I'm just asking for tax purposes, not looking for any legal battles or anything... just trying to make sure I do my taxes correctly. (This is what I get for waiting till the last minute instead of going to a tax guy... :( ) – CodeRedick Apr 13 '15 at 15:32
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    Be careful. If the place was worth $1000 and she paid $800, the IRS might decide that you gave her a $200 present and you need to pay tax for $1000 rental, even though you only received $800. Of course the IRS needs some evidence that the place is worth $1000, but if you tell them then they have the evidence. – gnasher729 Apr 19 '15 at 23:14
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In tax context, the concept of a "fair rental value" is used mainly so that people do not rent for $1000 and then pay they taxes as if they have received $800. It is not about fairness as a moral judgment but rather a synonym for "market prices".

To determine the market prices, look for how similar properties are rent (or offered for rent) where you live. The difference between $1000 (if that is the current market price) and $800 is unlikely to trigger IRS attention (and you are not cheating your tax returns claiming you received only $800 either) but it might trigger your revisiting the terms of the rental contract. This can be complicated if the other party insists on the current contract which is in their favor, so try to consider what could be in that for them. Such as a peaceful ex-relationship or the sense of their spoken commitments about the duration of the contract being considered upheld or some seemingly unrelated contractual matter being resolved with you for them. Failing that, figure out when they will have to renegotiate, mainly from the contract itself.

Generally speaking you should not strive to be told the marked price by the other party of the contract; you should form an independent opinion of it. It does not matter whether they are a real estate agent. Every competent real estate agent rents under, not above the current market prices, for their own needs.

If you do try to revisit the terms of the contract, make up your mind whether you want it to be short term or long term, and put that into the contract, including what happens if there is a need for re-negotiation or if written promises are not kept.

Note that market prices evolve over time, so don't dwell too much on a rough number you have been told some time ago, but rather look up current comparisons. Look up several of those so that you can get a feeling of the spread (random factors, from your perspective) as well. Also try to look up how long they tend to stay offered on the market; the higher priced properties remain not rented for a longer time which is kind of equivalent to renting out at 0$ to an extremely tidy person, and not having to do taxes on it.

Renting to someone you personally know and who isn't likely to set your property on fire anytime soon, is an advantage worth taking into account in these calculations, if that's the case of your ex-girlfriend. Random strangers include some reckless types.

  • But what about the second part of the question: How does it benefit me to say it wasn't rented at fair rental value? – CodeRedick Oct 12 '16 at 3:22
  • @Telos - You generally don't do this. But you must do this if you for example are receiving additional non-monetary compensation, resulting in a higher tax. The occasional extra benefit of doing so could be that you could claim expenses related to that rental up to the fair market value, not just up to the rent itself. I believe that in your case $800 is FMV for tax purposes because this was voluntarily contracted and received and no side compensations or pressures are stated in your post. My answer isn't tax centric, this comment is. – Jirka Hanika Oct 12 '16 at 16:18

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