Renting to family and friends: Handle with care

Ordinarily, you can deduct the expenses of owning and operating a rental property. You may even be able to claim a loss if those expenses exceed your rental income (subject to certain limitations).

However, suppose you rent a property to a family member or friend for less than fair market rent. In that case, the IRS will consider the property a personal residence rather than a rental one. As a result, you’ll still have to report the rental income on your tax return, but you’ll lose many of the deductions associated with rental properties. On the bright side, depending on the circumstances, you may still be able to deduct some or all of your mortgage interest and property taxes.

Feeling philanthropic? Avoid splitting property among charities

When you make a bequest of property to a charity, its value is exempt from estate tax. However, according to the U.S. Tax Court, that may not be the case if you split an asset between two or more charities.

In one case, a donor left her 100% interest in a limited liability company (LLC) to two charities: 75% to a private foundation and 25% to a church. When she died, the LLC, which owned an interest in a mobile home park, was valued at just over $25 million. On her estate tax return, her estate deducted the LLC’s full value as a charitable donation.

The court agreed with the IRS that fractional interest discounts should be applied to each charity’s gift, reducing the combined charitable deduction by more than $4 million and triggering nearly $1.7 million in additional estate tax. To avoid this result, donors should consider leaving an asset to a single charity, such as a private foundation, and allow the foundation to determine its ultimate disposition.

Businesses are vulnerable to identity theft

Business owners, beware: Online identity theft is a growing threat that can cripple your company or shut it down forever. Signs of business identity theft include being unable to file a tax return because one has already been filed using your Employer Identification Number, receiving a rejection for a routine extension and obtaining tax transcripts that don’t match your tax returns.

To guard against this all-too-common cybercrime, install antimalware and antivirus software and deploy firewalls. Also, multifactor authentication should be used, sensitive files should be encrypted and backed up, and access to these files should be limited to authorized personnel. Contact us with questions, or search “business identity theft” on the IRS website.

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