Today TaxMama hears from Bill in California who says,“I am considering renting a home that I own to a relative. I recently read a snippet that stated ‘’…People who rent property to their family or friends can lose virtually all of their tax deductions.’’ Is this true? If so, under what circumstances would I lose my rental property tax deductions?”
Hi Bill,
That’s interesting. I don’t know where you read that.
You could lose the treatment of the property as a rentalproperty if the arrangement wasn’t a legitimate rental. But if you charge your relatives market rent and have a signed rental agreement, and they paid you every month, you should have no problem.
Work the arrangement just as you would any stranger and IRS won’t care if you rent to relatives.
The problems arise when relatives pay significantly reduced rent, generating a deductible loss. Or if they don’t pay rent and you let them slide without takingnormal legal action. IRS is not in the business of subsidizing your familial generosity.https://www.irs.gov/taxtopics/tc415.html
But the real problems don’t come from IRS. They often tend to come from family members who do impose on your generosity. I have heard real horror stories from people who’ve rented to family. Family members have not paid rent, pushing the guilt buttons to keep the landlord at bay. They have damaged the property. Heck they have damaged the property and filed claims with the health department over damage they created themselves.
Most of the time this kind of thing doesn’t happen. But if you have any doubts in the back of your mind about the people you’ll be renting to – don’t rent to them. Trust your instincts.
And remember, you can find answers to all kinds of questions about your related party transaction and other tax issues, free. Where? Where else?At TaxMama.com
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on thesubscribe link and join us.]- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- IRS Tax Topic #415 :: Renting Residential and Vacation Property (formerly Renting Vacation Property and Renting to Relatives)
- MarketWatch – Lew Sichelman :: How to handle taxes on a home you own but let relatives use
- Nolo Press Article by Stephen Fishman :: Top Ten Tax Deductions for Landlords
- Nolo Press resource :: Wills and Estate Planning
Update – 2022:
As millions of Americans continue to work remotely, increasing location freedom, many have considered investing in a rental property for some extra income. Our experts at Bankrate created a guide on how to acquire and establish a rental property, whether it’s a sound investment for your lifestyle, and all other financial implications involved in the process.
https://www.bankrate.com/mortgages/how-to-establish-a-rental-property/
