1040-US: UltraTax CS is allowing losses for a rental to a related party. Why?

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Question

Losses are not allowed for rental to a related party, so why is UltraTax CS allowing such losses?

Answer

There are two situations regarding renting to a related party that can affect the tax return differently.

  • Rental at a fair value to a related party using property as a residence. Under IRC Sec. 280A (d) (3), if a taxpayer is renting property to a family member at a fair value price (fair market value), any loss incurred is deductible by the taxpayer, subject to the normal hobby loss, at-risk, and passive activity rules.
  • Rental at a less than fair value to a related party. If the property is rented at less than a fair price, the rental house is considered a personal residence. The days rented would be counted as days property was used personally.

UltraTax CS can correctly calculate the return in both cases. Case 1 requires no special input. Case 2 requires entry in the Vacation home fields in Screen Rent-2, if property has some fair rental days.

Related topic: Passive loss information FAQs (1040)