My wife and I own a home out of state that we are renting to her mother. Typically the rent we charge her covers the loan, basic repairs, taxes and insurance. This year however we had to spend $3000 on a new furnace. I have been told in the past that we cannot claim a loss on the property since we are renting to a relative. Is that true?
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Not true…any loss you take on an investment is tax deductable.
Actually I think not, unless the agreement is informal and she doesn’t pay you regularly or so.
If you don’t record the rent as income, i’d maybe leave it alone all together. But otherwise, you should be able to write off the improvement to any building you own, rented or otherwise.
It varies by state and by federal year. Ask your accountant. And almost all accountants make their fee for you!
I don’t think it makes any difference as long as there is a bona fide rental arrangement and payment of rent. You would treat it like any other rental property for tax purposes.
Rental income and expenses are reported on a separate schedule attached to your Form 1040.
I believe you should be able to if you have a contract with the person and you have records showing they are a paying tenant. If they pay money I think the “gift” issue is null in void as they are purchasing from you and such you are selling whether they were family or not. However I do not know 100%.
The real question is what is the fair market rental amount for that size property.
If you do not charge the fair market rate, then you aren’t doing this to “make a profit” and the IRS will limit your expenses to the amount of income you recognize.
Even if you were charging fair market rates, the new furnace is a capital expense, not a repair. Capital expenses get added to your basis and depreciated.
From publication 527:
Not Rented for Profit
If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot carry forward to the next year any rental expenses that are more than your rental income for the year. For more information about the rules for an activity not engaged in for profit, see chapter 1 of Publication 535.
Where to report. Report your not-for-profit rental income on Form 1040, line 21. You can include your mortgage interest (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions.
Claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on line 22 of Schedule A (Form 1040). You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income.
Postponing decision. If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. You may choose to postpone the decision of whether the rental is for profit by filing Form 5213.
See Publication 535 for more information.