Can I deduct property taxes when renting under FMV to family as not for profit?

Thanks for the clarification! So just to make sure I understand correctly - if I collect $11,400 in rent for the year, and my annual property taxes are $4,300, mortgage interest is $6,800, and insurance is $1,200, I can deduct the mortgage interest first ($6,800), then property taxes ($4,300), and then only $300 of the insurance (to reach the $11,400 cap)? And I'd need to report all this on Schedule E? Also, do I need to formally document somewhere that this is "below FMV" or will the IRS just assume that based on the family relationship?

Yes, that's exactly right! You'd deduct the mortgage interest first ($6,800), then the property taxes ($4,300), and finally just $300 of the insurance since that brings you to your total rental income of $11,400. You can't exceed the income amount in deductions. You don't need any formal documentation proving it's below FMV, but it's always good to have some evidence of comparable rental rates in your area just in case you're ever questioned. The family relationship itself doesn't automatically make it below FMV - it's the actual rental rate compared to market rates that matters.

Does it actually look at your specific tax situation or is it just generic advice? I'm in a similar boat renting to my daughter below market but my property is in a trust which makes things even more complicated.

I'm skeptical about these online tools. How can it know what the fair market value actually is in your area? Did you have to provide comparable rental listings or something? And does it factor in special circumstances like if you're renting out just a portion of a property?

It's definitely not generic advice - it analyzes your specific documents and situation. It asked me details about my rental arrangement, income received, expenses, and relationship to the tenant. Then it gave personalized guidance about my deduction limits and tax forms. For market value questions, it actually prompted me to input some comparable rental data or estimates for my area to establish the FMV. This helped determine whether my rental qualified as "below market." And yes, it absolutely handles partial property rentals - you just specify what percentage of the property is being rented out and it adjusts the calculations accordingly.

How does this even work? The IRS phone lines are impossible to get through - I've tried calling like 50 times about my rental property question. Is this legit or some kind of scam?

Yeah right. I find it hard to believe any service can magically get through to the IRS when nobody else can. And even if you do get through, the agents give different answers depending on who you talk to. I've been burned before getting "official" IRS advice that turned out to be wrong.

It's a callback service that uses technology to navigate the IRS phone system. They basically wait on hold so you don't have to, and then call you when they get through to an agent. I was skeptical too, but it actually works! As for getting consistent answers, I made sure to take detailed notes during my call including the agent's ID number. The agent I spoke with specifically referenced the IRS Publication 527 regarding not-for-profit rentals, so I felt pretty confident in the information. It's definitely better than guessing or getting conflicting advice online.

Is there an actual percentage cutoff in the tax code? I've always heard different numbers - some say 10% below market, others say 30%. I'm renting to my son at about 15% below market and reporting it as a normal rental with all deductions. Should I be worried?

There's no specific percentage cutoff written in the tax code. The IRS evaluates this on a case-by-case basis. From what I've seen in practice and from discussions with tax professionals, anything less than 20% below market might be questioned, but it really depends on your specific situation and documentation. At 15% below market, you're in a bit of a gray area. If you're treating it as a normal rental and taking all deductions including potential losses, you might want to increase your documentation of why that rate is reasonable - perhaps there are conditions or limitations that justify the slightly lower rate beyond just the family relationship.

So does that mean if my expenses are higher than the rent collected, I'm better off just treating it as a personal residence I'm sharing rather than a rental? I'm charging my parents $700/month for a place that would normally go for $1200.

That's a really good question, Andre! If your expenses significantly exceed the rent you're collecting, you might actually be in a tricky spot tax-wise. With a not-for-profit rental, you can only deduct up to the rental income received - so if you're collecting $8,400/year ($700x12) but have $15,000+ in mortgage interest, taxes, insurance, etc., you can only deduct $8,400 worth of those expenses. However, you can't just "not report" rental income to avoid this limitation. If you're receiving regular payments from your parents for housing, the IRS would likely consider that rental income regardless of how you classify it personally. You might want to consider whether the rental rate truly reflects the "not for profit" classification, or if you should adjust the arrangement. Some people in similar situations charge a higher "market-based" rent but then gift money back to family members (within annual gift limits) to help with their finances. This can sometimes provide better tax treatment, but you'd want to run the numbers and possibly consult a tax pro for your specific situation.