It is not automatically one or the other. Our starting point is 26 U.S. Code § 280A, Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc. Classification determines what costs and expenses taxpayers can deduct. A house may be considered a personal residence, a vacation home or rental property, and determination of that classification can be the difference in thousands of dollars in deductions.
You did not say if they will be paying rent, and then, if that rent is fair market rent. If they are not paying rent or not paying fair market rent then it is personal use. If they are paying rent and it is not fair market rent it is also income, but you cannot take the deductions for depreciation, repairs and such that you were able to when it was a rental.
Even if it is fair market rent, make certain you have support for it. This can include, but should not be limited, to asking a real estate agent to price out the rental, similar rents in the area etc. Be cautious about offering a discount for a good renter, and do not subsidize the rent through a gift to your daughter.
You have some level of control over how this is treated, so ultimately you can make the decision, but make certain to have the support to back it up.
Thank you for your question @Hokioahu
All the best,
Marc T.
TurboTax Live Tax Expert
27 Years of Experience Helping Clients
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