Article Posted on 12/05/2019
We frequently receive questions about renting a house to a relative. If you are considering doing this, for tax purposes the most important thing to remember is that you should charge a reasonable, fair market amount for rent.
For purposes of this discussion, a “relative” means a spouse, child, grandchild, parent, grandparent, or a sibling. If you rent a house to a relative who uses the home as their principal residence for the year and the rent is at a fair rental value (not discounted), then you claim the rental income and all associated rental expenses including depreciation. Should this result in a loss, it is deductible by you subject to the passive loss rules.
The problem arises if the rent is less than fair rental value because the days rented at less than fair rental value to a relative are deemed to be personal use days. At this point, you are required to allocate all rental expenses between the personal and rental portions of the year. For instance, if the home is rented to a relative at below market rent for the entire year, then your rental days are zero. In this situation, you are required to report all the rental income, but none of the rental expenses are deductible on your rental schedule (you may still be able to claim the real estate taxes and home mortgage interest as an itemized deduction).
To determine a fair rental rate, the main factor to consider is the level of rent in your area for comparable properties.