As a leading property management firm in Tampa serving the greater Tampa Bay area, Vintage Real Estate Services focuses on single-family home rentals. Many of our clients are "accidental landlords" exploring renting their property to family members. Our comprehensive turnkey services streamline the process—from finding and buying properties to renovating, renting out, and managing them—all under one roof.
This blog delves into the tax implications of renting to family members, addressing a common concern among our clients who aim to support their loved ones through property rental.
Renting to Family Members: The Basics
Renting a property to family members can be a generous gesture, especially as rents continue to rise in Tampa. However, this act can have significant tax consequences, potentially leading to the loss of valuable tax deductions. Understanding the distinction between business and personal use of real estate and how the rules change when renting to relatives is important for making informed decisions.
Business vs. Personal Use of Real Estate
When you use real estate strictly for business purposes, such as renting it out to unrelated parties as an income source, you must report the rental income. You can deduct various expenses, including mortgage interest, property taxes, utilities, depreciation, property management fees, and maintenance costs.
These deductions can be substantial, and if your expenses exceed your rental income, you may be able to claim a loss, subject to certain limitations.
On the other hand, if you use a property as a personal residence (such as your primary home or vacation property) and rent it out for fewer than 15 days per year, you don't need to report the rental income, but you also can't deduct related expenses.
If you itemize deductions, you can still claim personal deductions for mortgage interest and property taxes to the extent allowable.
When you rent out a property for 15 days or more per year, the IRS considers it a mixed-use property.
This means the property serves both personal and business purposes:
- Reporting Rental Income: You must report the rental income you receive from tenants on your tax return.
- Allocating Expenses: Expenses related to the property need to be divided between personal use (if applicable) and business use (rental purposes). Personal use expenses typically cannot be deducted, while expenses related to the rental business can.
- Deducting Expenses: You can deduct expenses directly related to the rental business (such as repairs, maintenance, and property management fees) from the rental income you report. However, these deductions cannot exceed the income you generate from renting the property. In other words, you cannot claim a rental loss for tax purposes if your expenses exceed your rental income.
- Carrying Forward Disallowed Deductions: If your deductible expenses exceed your rental income for the year, the excess cannot offset other income in the current year. Instead, these disallowed deductions can be carried forward to future tax years and used to offset rental income in those years.
The Impact of Renting to Family Members
Renting to family members introduces additional complexities. According to IRS rules, when you rent to relatives, the use of the property is considered personal use, even if the family member pays rent unless two essential requirements are met:
- The family member uses the property as their principal residence, and
- The family member pays fair market rent.
If these requirements are not satisfied, you must report the rental income if the property is rented for 15 days or more per year, but related expenses will not be deductible.
Ensuring Compliance with IRS Rules
To avoid losing valuable tax benefits when renting to family members, setting the rent at or above fair market value is essential. Documenting fair market rent with comparable local rental rates can help substantiate your claims if questioned by the IRS. Additionally, if you provide financial gifts to help family members with rent, the IRS may view this as discounted rent, further complicating your tax situation.
Here are some practical steps to ensure compliance:
- Research Market Rates: Use local rental listings and market analysis tools to determine a fair market rent for your property.
- Document Everything: Keep thorough records of rental agreements, payments, and any financial gifts or assistance provided to family members.
- Consult a Tax Professional: Given the complexity of tax regulations, seeking advice from a tax professional can help you navigate these rules and avoid potential pitfalls.
Understanding the Tax Consequences
While helping family members with housing expenses is commendable, you must know the tax consequences of renting to relatives. Failing to adhere to IRS requirements can lead to the loss of deductions that could significantly impact your financial bottom line.
Here's a summary of what you need to know:
- Principal Residence Requirement: The property must be the family member's primary residence.
- Fair Market Rent: Rent charged must be at or above fair market value to qualify for deductions.
- Personal Use Consideration: Renting to family members is considered personal use unless both conditions are met.
Case Scenarios
To illustrate the impact, let's consider two scenarios:
Scenario 1: Renting Below Market Rate
John owns a rental property and decides to rent it to his daughter, who is facing financial difficulties. He charges her $800 monthly, while the fair market rent is $1,200. Despite the noble intention, John cannot deduct rental expenses because the rent is below market rate, and the use is considered personal.
Scenario 2: Renting at a Fair Market Rate
Sarah rents a property to her brother at the fair market rate of $1,500 monthly. Her brother uses the property as his principal residence. Sarah ensures that the fair market rent is documented with comparable local listings. Sarah can deduct rental expenses in this scenario as she meets both IRS requirements.
Property Management Firm Tampa
At Vintage Real Estate Services, we understand the complexities of renting property to family members and the importance of adhering to IRS guidelines to preserve valuable tax deductions. Our team offers a free rental analysis tool that helps property owners determine fair market rent based on local market trends and comparable listings, ensuring compliance with IRS regulations.
Additionally, hiring a professional property manager is not only a wise investment but also a tax-deductible expense! We handle rent collection, lease agreements, maintenance issues, and tenant relations, minimizing conflicts and preserving family relationships.
Whether renting to family members or unrelated parties, our expert guidance and comprehensive services are designed to maximize your investment while providing peace of mind. Contact us today to learn more about how we can help you navigate the complexities of rental property
David Sigler is a Florida native who grew up in Fort Lauderdale Florida. He attended the University of Central Florida where he received his bachelor’s degree in Business Administration. David has since become a licensed General Contractor & Real Estate Broker. He has been active in Florida real estate and construction for over 15 years. During the Great Recession he was forced to refocus his ambitions and landed on property management. Starting with a handful of homes that could not be sold, he grew his portfolio and eventually bought the brokerage. With his experience, knowledge, and resources, his company prides themselves on successful turn-key residential investment solutions. He now manages hundreds of homes covering 5 counties and his construction company provides maintenance services to his management company as well as other local managers. David is an active member of the National Association Residential Property Managers and has served on the Florida State Board for over 6 years in many different roles; most recently as the NARPM Florida Chapter President (2019). Active in the GTR community, he has served on the property management subcommittee for over 4 years and recently as chair of the group. He is also active in local and state legislation that affects the property management industry. His unique understanding and perspective of property management and its associated maintenance has provided him with numerous public speaking opportunities. Outside of work, not only is he an avid outdoors man and a board member for several local Non-Profit organizations, but first and foremost a Father and Husband.