Confused about Minimal Rental Use rule when family pays below market rent

Thanks for explaining! So if I understand correctly, since my sister pays significantly below market value, the IRS likely sees this as personal use by me, not a rental situation? If that's the case, do I still need to report the money she gives me toward the mortgage as "income" anywhere on my tax return? Or since it's deemed "personal use" I don't report anything at all?

If the IRS deems this a personal use situation, you typically wouldn't report the payments from your sister as rental income. The money she gives you would generally be considered cost-sharing or even a gift, not rental income for tax purposes. However, you would lose the ability to deduct rental expenses against that money. You can still claim mortgage interest and property taxes as itemized deductions on Schedule A (subject to the standard deduction comparison and SALT limitations), but you couldn't deduct things like insurance, maintenance, or depreciation as rental expenses.

How does this actually work? Do real tax professionals review your info or is it just some AI thing that might miss important details? My brother lives in my second home and only pays utilities, so I'm in a similar boat.

Sounds interesting but I'm skeptical about uploading my financial docs to some random website. What about privacy concerns? Did you feel comfortable sharing all that info?

The analysis is done using a combination of AI and tax professionals who specialize in real estate taxation. The AI handles the initial document review, but complex situations get escalated to actual tax pros who provide personalized guidance. It's definitely not just generic advice. Regarding privacy, I had the same concerns initially. They use bank-level encryption for all documents, and their privacy policy explicitly states they don't sell or share your information with third parties. All the tax professionals are bound by confidentiality requirements, just like if you visited an in-person CPA. I felt it was actually more secure than emailing documents to my previous accountant.

How does this service actually work? I thought it was impossible to get through to the IRS these days. Is this just them calling on your behalf or what?

Sounds like a scam to me. Nobody can magically get through the IRS phone system. They probably just keep calling until they get through which you could do yourself for free. Plus they probably record your conversation which could cause problems.

It's not them calling on your behalf - what they do is monitor the IRS phone system and alert you the moment a line opens up. When the system detects an open line, it calls you immediately and connects you directly to the IRS queue that's accepting calls. You still talk directly to the IRS yourself. They don't record your conversation at all - they're just getting you past the busy signals and "call back later" messages. The actual conversation is just between you and the IRS agent. They essentially solve the problem of timing your call perfectly. I was skeptical too until I tried it and got through in minutes after spending days trying on my own.

But what exactly qualifies as "fair rental price"? Is there a specific percentage below market that's considered the cutoff? Like if market rent is $1500 but I charge my nephew $1200, is that still "fair" or is it now personal use?

The IRS doesn't specify an exact percentage that constitutes "fair rental price," which is part of what makes this confusing. Generally, fair rental price means comparable to what you would charge an unrelated person, considering the property's location, features, and condition. Most tax professionals use a rule of thumb that anything below 80% of market rate could be questioned, but this isn't an official IRS rule. For your example, $1200 for a $1500 market value property (80%) would probably be considered reasonable and count as a fair rental price, but it's somewhat of a gray area. The further below market value you go, the more likely the IRS would consider it personal use.

I did something similar with my parents living in my rental house, but got audited last year! The problem was I had previously rented it as a true rental property and then switched to family-only without documenting the change in use. Make sure you're consistent in how you classify the property year to year.

This is really helpful! I'm in a similar situation where I'm new to dealing with rental properties and family arrangements. Can you clarify what you mean by getting a "comparative market analysis" from a realtor? Is this something they do for free, or do you have to pay for it? I want to make sure I have proper documentation like you mentioned, but I'm not sure how to go about getting that fair market value established officially. Also, when you say "be consistent in your treatment" - does that mean if I classify it as personal use this year, I have to keep it that way as long as my sister is living there at below-market rent?

Great questions! For the comparative market analysis (CMA), most realtors will provide this for free, especially if you have any kind of existing relationship with them or if you mention you might need their services in the future. You can also get a good sense of fair market value by looking at similar rentals in your area on sites like Zillow, Apartments.com, or Rentals.com. Just make sure to save screenshots or print out the listings with dates to document your research. Regarding consistency - yes, that's exactly right. If you treat it as personal use while your sister is there at below-market rent, you should continue that treatment for as long as the arrangement stays the same. If you later decide to charge her market rate or rent to someone else at market value, then you could switch back to treating it as rental property. The key is being able to justify your classification based on the actual facts of your situation. The IRS doesn't like to see people switching back and forth between personal use and rental property classifications without clear reasons, so documenting any changes in the arrangement (like rent amounts, lease terms, etc.) is important for your records.

This is such valuable advice about the profit motive test - I hadn't considered that angle before! I'm actually dealing with a similar situation where my brother is staying in my investment property and only covering the HOA fees and part of the utilities. Your point about having something in writing really resonates with me. Even though it's family, I think documenting the arrangement formally would help clarify expectations on both sides and provide that paper trail you mentioned. Did you use any specific template for your agreement, or just write up something simple outlining the payment terms and responsibilities? Also, when you mention that mortgage interest and property taxes can still be claimed on Schedule A - is there any limit to how much of those expenses I can deduct if the property is classified as personal use? Or can I deduct the full amounts as long as I'm itemizing?

Great question about the Schedule A deductions! For mortgage interest and property taxes on a property classified as personal use, you can generally deduct the full amounts as long as you itemize, but there are some important limitations to be aware of. For property taxes, you're subject to the $10,000 SALT (State and Local Tax) cap that includes property taxes on all your properties combined with state/local income taxes. So if you're already at that limit with your primary residence and other taxes, you might not get additional benefit from the second property's taxes. For mortgage interest, it depends on when you acquired the property and how much debt you have. The current rules allow deduction of interest on up to $750,000 of acquisition debt ($1 million if acquired before December 15, 2017) across all your residences. Since this is your second property, it would count toward that limit. For the written agreement, I kept mine really simple - just a one-page document stating the monthly amount, what utilities/expenses each person covers, and basic terms like notice period for changes. Nothing fancy, but having it dated and signed by both parties shows it's a deliberate arrangement rather than just informal help. You can find basic templates online or even just create a simple bullet-point agreement.