Reporting Not-For-Profit Rental Income From A Household Tenant

Many homeowners receive monetary payments from a tenant who lives in an area such as a garage apartment or a basement. Some tenants pay less than what would be considered fair market value. Homeowners who receive not-for-profit rental income report that rental income differently than someone who rents out real estate in an arm's-length transaction.

The key aspect to classifying a rental agreement as not-for-profit is that the arrangement is not driven by market forces. Your tenant is likely to be an acquaintance who you can trust to care for the property almost as if it were their own. Even if you have agreed on a fixed amount for the reduced rental payments, you may also be flexible as to the timing of each remittance.

Rent is reported as other income on Form 1040

Unlike income from a regular rental property, not-for-profit rent is not reported on IRS Schedule E. Instead, not-for-profit rental receipts are reported on a specific line of Form 1040 labeled as other income. Unlike a regular rental property, you cannot depreciate a not-for-profit rental space. However, there are deductions that may help offset the taxable income reported.

Rental costs are itemized deductions

If you itemize deductions, the mortgage interest and property taxes paid on your entire personal residence can be deducted. Schedule A for Form 1040 is used for calculating your itemized deductions, and one section of Schedule A is for miscellaneous deductions. Miscellaneous expenses of maintaining a not-for-profit rental include categories such as

  • painting
  • plumbing repairs
  • utility costs attributable to the rental area

Miscellaneous itemized deductions are deductible only to the extent they exceed 2 percent of an entry line on Form 1040 labeled as adjusted gross income. Because of this threshold limitation, all of your miscellaneous rental expenses may not be deductible unless you also have other types of miscellaneous deductions that reach the threshold

Financial outcome is readily apparent

Unlike a regular rental property, a not-for-profit rental cannot create a tax loss. The total deductions attributable to the not-for-profit rental cannot exceed the associated revenue generated throughout the year. Because there is no additional deduction for depreciation, it is much easier to visualize the financial results of a not-for-profit rental.

A not-for-profit rental might incur minimal expenses, resulting in a welcome increase to your taxable income. On the other hand, ongoing costs for repairs or maintenance might provide the motivation to re-evaluate the rental arrangement. Contact an accountant, such as Hough & Co CPA, for more advice on tax preparation services.