Rental property

[Milk Thistle]

Hi,

My parent and a sibling are living in my second home.  The median rent is $3,500 per month.  They have low income, each can only contribute $800 a month.  We file separately.

Question:

I consider $1,600 as a gift because it is below the fair rent value.  They think it is rent and want to file as such.  Is that acceptable?

Please advise, thanks.

[xmasbaby0]

What do you mean ".........they want to file as such..."?   Are they trying to claim a rent credit on a state return?   They cannot put rent on a federal return.   There are only a few states with a rent credit---what state are they in?

 The states that have anything for rent are Arizona, California, Connecticut, Hawaii, Indiana, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, Rhode Island, Vermont, Washington DC, and Wisconsin.

[Milk Thistle]

Thanks for the reply.

Yes, they are trying to claim rent credit.  We are all in California.

[DianeW777 · Accepted solution]

If the payments are in fact rent, then you are required to report the rental income, however since it is below fair rental value (FRV) the expenses are limited to the amount of income and cannot create a loss that offsets other taxable income. The following publication can be helpful to consider your specific situation.  Search for 'fair rental price'

• IRS Publication 527-Rentals

The eligibility requirements to utilize the Renter's Credit on the California (CA) return can be found at the link below.  This may help you to determine if they are even eligible.

• CA Nonrefundable Renter's Credit
  • The CA Renter's Credit is a nonrefundable credit worth sixty dollars (or a hundred and twenty dollars if you're married, filing jointly or a widow/widower or RDP) that can be applied to your CA income tax if you've lived in a rental property for more than half the year.

[xmasbaby0]

Sounds like a case of no good deed goes unpunished.   User rents to family members at way below market value, they want a sixty dollar credit, and now user has to pay tax on the rent received.

[Milk Thistle]

Many thanks for the guidance :).