My kids are college age and finding affordable, safe housing for them is a top concern. I have a couple of friends who’ve opted to purchase property by their child’s campus for them to live in through their college careers. I did a little research to find out if it would be a viable option for us, too.
Should I Lease My Rental Property To Family?
The bottom line is, it’s not as simple as it sounds. Of course expenses and depreciation come with the investment of another property, but the biggest decision to make is whether or not you’ll accept renters. Most people will still consider it because of certain tax deductions. However, as soon as you accept rent payments you are subject to rules and regulations. These vary by state.
Tax Deductions for Rental Property
If you rent below fair market value (which could be likely if the tenant is your child), the IRS will classify the rental property as personal-use property. If that’s the case, it won’t technically count as rental property or qualify for those tax benefits. Plus, any rent received must be reported as income. The only expenses allowed when a property is classified as personal use property are mortgage interest and property taxes.
Losses are usually incurred on rental properties during the first few years due to depreciation and high mortgage interest. In most cases, these losses may be deducted against your income for tax purposes.
Owning rental properties can create tax advantages, but they are highly regulated. There are plenty of benefits to buying the rental property instead of renting, the first being peace of mind. You’ll eliminate the hassles and fees that come with renting for at least four years.
Do you rent property to relatives? How do you classify the property? Personal or rental? Call me if you think your rental property might be on the cusp of being classified as personal use. We can help you manage the tax consequences.
By Frank Hambalek, CPA
Partner
Frank specializes in high-level consulting and financial reporting work with medium- to large-sized construction and real estate companies. With his talent in managing systems and people, he has served as an outsourced CFO for many clients. Other specialties include internal fraud prevention, GAAP standards, and new leasing standards.
