Renting a House to Family Member for less than Cost

[GMoor]

I purchased a town house this year and am renting it to a family member for less than the amount of house mortgage payments and property taxes. I will claim all rent paid as income and plan to deduct expenses for repairs. I plan to adjust the cost basis of the house by the cost of replacing a hot water heater.  Is this proper?  If the tax code does not allow me to rent the house for less than fair market value, how do I establish fair market value, since market value for rent might still be less than mortage payments and taxes? 

[ColeenD3 · Accepted solution]

No, If you are not renting at a Fair Rental Value, you can't treat the property as a rental. You can take the mortgage interest and property taxes on Schedule A, as a second home. Any improvements are added to the basis of the home.

Not Rented for Profit

If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

Where to report.

 Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8. If you itemize your deductions, include your mortgage interest and mortgage insurance premiums (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.

[SweetieJean]

Renting for profit isn't just a comparison of cash in v. cash out.  As indicated, your total mortgage payment is not deductible; only the interest and property taxes are.  However, you do get to deduct depreciation, so that must be factored in.  If your rental income is more than your rental expenses (as defined by the IRS) for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

To determine if you are renting at Fair Market Value, look at comparable properties, or ask a local real estate agent.

[GMoor]

Thank you so much for your help!