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We own a apartment building in a LLC in Massachusetts. There…

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We own a apartment...

We own a apartment building in a LLC in Massachusetts. There are 2 owners and only I occupies a unit in the building. Since only 1 owner is living in the building rent free is it considered a draw from their account? The other owner is not being compensated in any way for the free rent the other owner receives.

Submitted: 1 month ago.Category: Tax
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Customer reply replied 1 month ago
Is there any tax benefits in massachusetts if a owner occupies part of the rental property? The building is a 4 unit building and the owner occupied unit usually rents for $3700 per month. How would I categorize the free rent that one owner is receiving.
Answered in 15 minutes by:
12/27/2017
Tax Professional: emc011075, Tax adviser replied 1 month ago
emc011075
emc011075, Tax adviser
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Satisfied Customers: 3,388
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Hi. My name is ***** ***** I will be happy to help you.

That's how it is usually treated because it is easier than keep allocating expenses, including depreciation, between personal and business use. For instance, if the unite occupied by one of the owners represents 1/10 of the building, all expenses would have to be allocated accordingly. This would just complicate bookkeeping, recordkeeping and tax reporting.

It is much easier to record fair market value of the rented unit as a draw to the partner who occupies the unit.

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Tax Professional: emc011075, Tax adviser replied 1 month ago

In MA you can deduct rent payments, up to $3000. But the rent would has to be paid to somebody else. You generally cannot deduct rent paid to a relative or your business.

The free rent, including any expenses allocated to the unite (utility and such) is categorized as owner's draw (owner's equity), depending how you set up your bookkeeping software.

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Customer reply replied 1 month ago
The property is in a LLC and 50% of the LLC is owned by intentionally defective grantor trust and the other 50% is owned individually. The intentionally defective grantor trust 1% (is owned by someone that does not occupy a unit) the other 49% ownership lives rent free. Would you still have a draw for the full fair market value $3700 or would it be a draw for $3663?
Tax Professional: emc011075, Tax adviser replied 1 month ago

The % is irrelevant. 100% of the FMV of the unite occupied by one of the owner (regardless of his ownership %) is treated as a draw to this partner.

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Tax Professional: emc011075, Tax adviser replied 1 month ago

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