one other rule
Below-Market Rentals to Relatives
If you do not charge a family member fair market value for a rental unit he occupies as his residence, you automatically lose certain IRS deductions you would otherwise qualify for. Relatives, according to the IRS, include your sisters and brothers (including half-siblings), your parents, grandparents, children and grandchildren. Renting below market to a relative, in the IRS view, becomes a personal use. A personal use cannot qualify for a rental loss deduction (where, for example, your rental expenses exceed your rental income. This practice also disqualifies the sale of the house as a business loss, where you sell the property for an amount less than the total of what you paid for it, plus rental income and minus rental expenses. If you take a rental loss deduction or a business loss deduction, the IRS will penalize you.
