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Visitor III

Fair Market Rent Question: How to Make Adjustment

Inside the rental expense section, TurboTax writes: "You may not get all the deductions you deserve if you're not charging fair market rent for your area." The only screen I saw related to this, prompted me to add the number of days it was used as a rental (out of 365) and how many it was used for personal use.


Is the "fair market rent" being automatically calculated, simply by adding those days? This was unclear to me.

1 Comment
Catalyst V

Fair Market Rent Question: How to Make Adjustment

When it comes to Fair Market Rental Value (FMRV) that number his highly subjective. If you search through the IRS publications you will not be able to find anything even close to a clear definition of FMRV. There is no magic formula that you can use, or the IRS uses to determine the FMRV of rental property either. Now there are general "unwritten rules" which by their very nature of being unwritten make them unenforceable, as well as unprovable to a degree.  One of those unwritten rules that I've heard (but never read anywhere that was authoritive on the subject) is that if you rent at less than 20% of the average rental price in a given area, then you are renting at below FMRV. I've also heard that it has to be more than 25% of a variance to be considered at less than FMRV. But again, you will not find anything in writing that is authoritive in nature about this. That makes determining the FMRV highly subjective to all parties concerned.

 

Therefore, I've come up with my own definition of just exactly what is Fair Market Rental Value for the three rental properties I own. Basically, it's What The Consumer Is Willing To Pay. In my option (and we all know what opinions are like!) you can't get any more definitive than that. But as stated earlier, my definition is in no way authoritive.  

 

Now I want to address another thing for you that you allude to in your post, just as a "helping hand" here to keep you from making a very common mistake landlords make - particularly new or first time landlords.  I get the impression that you may be claiming personal use days, when you in fact, have no personal use days. So what follows is some additional definitions to help clarify things for you.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER  you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day as your primary residence, 2nd home or vacation home during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence, 2nd home or vacation home after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.