Property Renting to Relatives
A family member that uses your rental property as his or her main home must pay a “fair market value” rent. Fair market value is the amount a person who is not related to you would be willing to pay. You MUST charge them a “Fair Market Value” rent in order to qualify for IRS deductions for renting to relatives.
Determine Fair Market Value
The easiest way to determine the fair market value is to ask a real estate agent in the area for comparative rentals. You could also check online rental sites as well.
If your relative pays a fair market value rent and uses the property as their principal residence, your relative’s use is not considered personal use by you and thus you qualify for the IRS requirement for renting to relatives. If you do not charge a “fair market value” for rent to your relative, the IRS will disallow any rental loss deduction.
IRS Definition of Relatives
When renting to relatives, you must understand the IRS definition of “relatives”.
Relatives who are within these rules are: brothers and sisters, half-brothers and half-sisters, spouses, parents, grandparents, children, and grandchildren.
Renting to relative example: Brandon owns and rents a home to his grandfather Bobby. A real estate agent estimated the fair market rental rate for the house to be between $850 and $900 a month. Brandon charges his grandfather $600 a month. A year later Brandon sold the house and claimed a rental loss and a loss on the sale. The losses are not deductible. The below market rent to Brandon’s grandfather would be treated as his own personal use of the house, thus preventing the rental loss deduction. Renting to relative in this case for Brandon is NOT tax deductible. The below market rental also demonstrates that Brandon held the property for personal purposes thereby negating his ability to deduct the loss on the sale as well.