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I thought that technically the LL then owes the IRS in imputed income? (Income based on market-rate rental values)?

Imputed income is not taxable in the United States, according to Wikipedia.

i think it may have to do with the type. I won a free yearlong gym-membership in a contest, from a govt workplace and was told I would have to pay imputed taxes on it. Needless to say, I turned it down.

That's because it was a gift of a fixed value that gym declared. If gym ran it as a promotional sale for $1.00 then you would have needed to pay taxes on a $1.00.

It is similar to person A borrows from a person B $10,000. B pays back $100. Person B decides that A is a deadbeat and declares $9,900 a loss. Since B no longer needs to repay $9,900 the $9,900 becomes income to A. B sticks A with a 1099 for $9,900. Now A needs to pay taxes to the IRS on $9,900 that he got from B.

Not in the United States.

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