Renting to a Relative
Special rules may apply when renting a home or apartment to a relative. If you rent a home to a relative who: (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it is rented at a fair rental (not at a discount), then no limitations apply. You simply treat it like any other rental property. However, if it is rented to a relative at below fair rental value, all of the expenses, except mortgage interest and property taxes, are considered personal expenses and therefore not deductible. Thus, it is important to set a “fair” rental rate when renting to a relative. Factors to look at include comparable rentals in the area and whether “side” gifts were made by you to your relative, which could be reasonably interpreted to be the bargain element. Relatives for this purpose include your spouse, child or grandchild, parent or grandparent, and siblings.
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