When renting to a family member, the rent must be a "fair rental price" in order for the rental period not to be considered personal use. IRS Pub 527 (page 21) says that this generally the amount of rent that an unrelated person would pay.
However, my colleague remembers a Tax Court case where it was successfully argued that it was legitimate to charge a family member a somewhat lower rent as, being related, they were considered likely to better maintain the property than an unrelated party. Does this sound familiar to anyone?
asked 12 Jul '10, 18:34
A quick search of RIA turned this up.
Lee A. Bindseil, TC Memo 1983-411. , Code Sec(s) 280A.
NONDEDUCTIBLE ITEMS—Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc. Taxpayer's rental of home to parents wasn't for fair rental value. Rental agreement wasn't enforceable concerning promise to make improvements to house; tenancy was terminable by either party on one month's notice; and taxpayer didn't meet burden of proof that he received fair rental value.
In Bindseil, the Tax Court held that such reasoning did justify a 20% discount off market rental value. While this argument may have merit, taxpayers who maintain such a position should be able to substantiate such claims with objective data (e.g., a discount equal to agency fees that would otherwise be incurred).
Renting to a family member at less than FMV may cause the dwelling to be considered personal property. If so, any loss on its disposition is a nondeductible personal loss (Barranti). Also, if no rent is charged, depreciation and maintenance expense related to the dwelling are not deductible (Sandoval).
I have had discounts allowed in audit but it was based on actual maintenance actually done by the tennant & would have been a discount regardless of relationship.
answered 13 Jul '10, 15:08
If you are a member of NAEA, post this on the NAEA webboard. It is amazing what folks pull up out of their deep memories.
answered 12 Jul '10, 21:30
Helen EA in PA
I have never heard of a case where a family member could rent and take full rental expenses due to the cause that they would take better care of the rental property.
There are cases in a distressed economy that you can rent for less than FMV, but for family members, it appears more like personal use.
answered 12 Jul '10, 21:31