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What are the pros and cons of renting below fair market valu

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What are the pros and cons of renting below fair market valu  Reply with quote  

Hey all,

My brother will be renting his basement to his stepsister for the next few years. Someone at his work recommended that he charge less in order to capitalize on the some tax perks that he otherwise wouldn't receive. As the financially savvy one in the family, he came to me for advice, but I honestly know nothing about this. I did a bit of reading on the subject, but I think I'm going to recommend that he speak to a specialist about this rather than myself. In case he doesn't, I'd like to give him some information so he at least has some information if forgoes my advice.

What are some of the pros and cons of renting below FMV? (I'm assuming that above FMV, you'd want to charge as much as possible). Also, is there a method to determine FMV beyond looking at comparable prices on kijiji?

Thanks for any help.

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Last edited by adamjohnson on Wed Mar 15, 2017 4:35 am; edited 1 time in total
Post Mon Sep 05, 2016 8:14 am
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Not every basement can even be made into a legal apartment, so fair market value might be irrelevant. If it can be a legitimate apartment, it's too bad he hasn't rented it before, so that he already has a feel for the price and whether he even wants someone living under him.

Having a landlord/tenant relationship between family - even step-family - is not ideal to say the least. If she has trouble paying the rent, he can't really kick her out.
Post Sun Sep 11, 2016 4:47 pm
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Well, he is starting out by breaking the First Law of landlording - "Never rent to a coworker, an acquaintance, a friend, and NEVER EVER to a relative, you need a formal arms length agreement with a STRANGER".

If this is going to be an "under the table" deal , where the income & expenses are not reported to the IRS, the FMV amount is irrelevant. (Obviously, you can't deduct expenses if you aren't reporting a rental income). BTW, you would be surprised at how many part-house rentals are cash-only.

If he is going to be legit, he'll need an occupancy license, a cert that states that there is fire access/egress out of the basement, adequate ventilation, extra ducting to make the basement qualify as 'livable' in accordance with your local zoning regs. But I can't think of additional tax perks due to sub-FMV rent. With my houses, I use the std 27 1/2 year IRS depreciation, the taxes, the insurance, any maintenance expenses. And subtract those (deduct) from my rental income. In your case you'll separate those costs into residence/rental and deduct proportionally. But I don't get (or see) a tax break from charging lower rent?
Post Sun Sep 11, 2016 6:34 pm
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