Renting a property to family members comes with a number of unique challenges, but one thing you might not have considered is the tax implications that are involved. Usually, the rent that’s charged to the family member is less than fair market value. This means less reported rental income on your taxes.
Renting Investment Property to Family: Rent Prices
So, if your daughter is renting a property from you and the fair market value for that home is $2,000 a month, perhaps you’ll rent it to her for $1,200. There are a couple of issues with that. The IRS says that if you rent the property to a family member at less than fair market value, it’s considered a personal use day. When you rent it at that rate for the whole year and you report a loss on that rental property, you’re not eligible to deduct it because those personal use days have effectively turned the property into a vacation home.
Renting to Relatives Tax Implications
You could also be considered gifting the difference in rent to your daughter. That’s $800 a month and $9,600 a year. So, you’ll have gift tax issues to look at. You’re allowed to gift up to $14,000 every year without filing a gift tax return. Make sure the difference in the rent you’re charging your family member and the amount of fair market rent isn’t more than $14,000 a year.
Be careful about the rental price when you’re renting out to family members. You’ll have to consider all of these tax issues.
Avoiding Tax Issues
The solution would be to go ahead and have your daughter pay you $2,000 a month. That way you’re collecting the market value in rent. Then, you can gift her back $800 a month. This will keep you under the $14,000 gifting limit, and you won’t have to worry about the tax consequences of personal use days and vacation home considerations.Craig V. Castanos is a Certified Financial Planner and Certified Public Accountant located in San Diego, CA. He can be reached at 619.235.2131 or firstname.lastname@example.org.