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Estates & Trusts

Rental Properties: Renting to Relatives and the Potential Tax Consequences

By March 24, 2016No Comments

Do you have a vacation or rental property and have or are considering renting to a relative? When considering renting to relatives, you also need to be mindful of the local market rate rents before you commit to any lease terms.  It is natural to want, or feel obligated, to give your relative(s) discounted terms, or allow them to live in the property rent free. However, doing so could result in a taxable sift.

If you own a property which you rent to another at the fair rental price, but you also use the property personally for the greater of 14 days, or 10% of the total days you rented the property at fair rental price, then you may be limited on the deductions you are eligible to take to offset the rental income as the property will be treated as a second home.  Additionally, if you charge less than fair rental price, the property is treated as your second home and you are limited as well.

A personal use day is considered to be a day in which you or someone with interest in the property resides within the property, a relative lives within the property, or any day that you rent the property at less than fair rental price. An exception to the relative use above is if they use the property as their primary residence and pay fair rental price, the property will be treated as a normal rental property and none of the days the relative resides within the home will be considered personal.

The rules around residential real estate can be very complex when the property is used as a vacation home or rented to relatives. Please feel free to contact us with any questions or concerns you may have in this regard at 858-558-9200.

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