Family member living in my second home

[Shadow219]

I built and moved into a new house. My daughter (married) moved into the original house. I wanted very much to collect enough 'rent' to offset my costs but that has not (and will not) happen.

I understand I don't have a traditional rental and I am not worried about claiming the losses in excess of rent received; because I understand I don't qualify. From what I have read this is a personal use home because the fair market test fails. I have seen many say I cannot deduct more in expenses than I take in. The specifics are where I am confused. Do I need to declare the funds I receive on Schedule 1 Additional Income (8j or 8z) then just take the usual deductions for Taxes, interest, etc, on my Schedule A - Itemized Deductions? Or should I use schedule E for Schedule 1 and declare the rent received but only enter expenses equal to that rent. In that case I would not Itemize those expenses. I really don't want to pay tax on the funds received when I am losing money on this situation. 

[DavidD66]

If you rent your property to a relative and do not charge fair market rent, the IRS does not consider the property a rental.  According to the IRS, a property is considered a personal residence if the owner or certain family members use it for personal use for 14 days or 10 percent of the days it is rented out.  In addition, if the property is rented to anyone, related or unrelated, for less than fair market rate, it will be considered a personal residence.

Payments received for below-market rent are considered "Other Income." Depending on which version of TurboTax you are using.  Go to Wages & Income >> Less Common Income >> Miscellaneous/Other Income.

You can offset the income with the expenses necessary to maintain the property (report the net income).  The mortgage interest and property taxes can be deducted as Itemized Deductions if you itemize.

[Shadow219]

Is there a form to show the 'expenses necessary to maintain the property' vs rents received? or just keep my own spreadsheet in case I am asked for it?

Also, can I use the taxes and interest as that offset if I don't itemize? I know better than to use it in both places. The Standard Deduction is so big nowadays it would be more beneficial to use them to offset the rent.

[AmyC]

1. No, there isn't a form. 

2. You will need to keep your own records. Your record keeping should include things like: add a fence, plant a garden, build a porch, etc as all these costs add to the basis of the property, for when it is sold. 

3. Yes, reimbursed expenses are nontaxable.  Let's talk about the rent. 

• If your daughter is reimbursing you each month for actual out of pocket costs like utility bills and property tax it could be a nontaxable reimbursement. This is the offset David mentions above.
• If your daughter is paying a flat rate each month, it is rent and should show on Sch a line 8z. Label it rent from family member for personal use property.

Prior to 2018, insurance, repairs, utilities, etc were deductible as an itemized deduction for this situation. 

One  point of caution: since you are charging below market value, the IRS views this as foregone rent. As long as the difference between fair market value and what she pays is less that the gift tax limit, there is no need to file a gift tax return. For 2025, the first $19,000 given to each recipient is excluded from gift tax. Since your daughter is married, that would be $19,000 to your daughter and another  $19,000 to her spouse. 

[Shadow219]

Thank you for the help.

The 'discount' is below $15,000 per year so no gift tax return will be needed.

It is a set amount but paid irregularly. We don't evaluate each month the amount owed so it sounds like I should I will report on line 8z as if it were paid regularly. 

The only clarification I need is can I reduce the taxable amount by;

Property taxes

Insurance

Utilities

Repairs & Replacement of appliances, furnace, etc

Or is it only improvements to the value of the property like you listed

Also, If I can use these to reduce the taxable amount it will most likely result in zero taxable amount most or all years. (taxes and insurance alone are $10,000 and they will likely never tender that much).  In that case there would just be no reference to it at all? My only concern is if there are payments via Zelle of say 8,000 could I some day be asked to show why? As if I'm concealing income.

[DianeW777]

It's important for you to understand what you are allowed to do under tax law for a 'not for profit' rental.

• Real estate taxes can be deducted on Schedule A, itemized deductions.
• Mortgage interest is not allowed unless you consider this a second home

Capital Improvements:

• As indicated by @AmyC the purpose of tracking these expenses is to continue to know your actual cost basis when and if you sell the property. This will lower the taxable gain on the property. They are not currently deductible. If at some point your daughter is paying rent close to the fair market value (FMV) for your specific geographic area, then you can begin to depreciate the property.  Or if you end up renting to someone else you can depreciate at that time.

Utilities, insurance or other current maintenance expense:

There is no current deduction for these expenses on your tax return. The rent received will be reported as indicated earlier, if your daughter begins to pay the utilities, etc, then as indicated it would be a reimbursement to you and that portion would not be income. You must keep the records to show what your payments are for.

Not for Profit Rental: IRS Publication 527, page 24

If you don’t rent your property to make a profit, you must still report your rental income, however, you can no longer deduct rental expenses. Where to report. Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8j. If you itemize your deductions, include your mortgage interest (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

Entry steps provided by @DavidD66 and posted here for your convenience.

• Payments received for below-market rent are considered "Other Income." Depending on which version of TurboTax you are using.  Go to Wages & Income >> Less Common Income >> Miscellaneous/Other Income.

@Shadow219