How to Claim Not for Profit Rental Income on Taxes?

Wait, so if we're renting to family below market rate, we don't have to report the income at all? That seems too good to be true. But then we also can't deduct any expenses except on Schedule A? What if we're taking the standard deduction?

If you're renting to a family member at below market rate and not trying to make a profit, you generally don't report the rental income. However, this means you cannot deduct rental expenses (beyond mortgage interest and property taxes) against that income. If you're taking the standard deduction, you wouldn't be able to separately deduct the mortgage interest and property taxes. In that situation, the standard deduction would be your only tax benefit related to the property. This is one reason why some people decide to charge fair market rent - it converts the property into a business activity where you can potentially deduct all ordinary and necessary expenses on Schedule E.

How does the tool work exactly? Like do you just upload your rental agreement or something and it tells you what to do? I'm in a similar boat but renting to my daughter.

I'm skeptical about these tax tools. What does it do that TurboTax or other major software doesn't already handle? Does it actually cite the specific IRS regulations?

The tool works by analyzing any documents you upload - rental agreements, expense receipts, etc. It then asks questions specific to your situation to determine the proper tax treatment. For family rentals, it specifically looks at your relationship to the tenant and the fair market value comparison. What makes it different from typical tax software is that it specializes in analyzing tax documents and explaining the "why" behind the tax treatment. It cites specific IRS regulations - in this case Publication 527 which covers residential rental property, including the rules about renting to family members below market value. Most general tax software just asks if you're making a profit without digging into the personal use rules that apply specifically to family rentals.

How does this actually work? I've been trying to call the IRS for days about a similar issue. Do they just put you in some special queue or something?

This sounds like a scam tbh. Nobody can get through to the IRS faster than regular callers. They probably just charge you and then you still wait forever. Has anyone actually verified this works?

They use a system that navigates the IRS phone tree for you and secures your place in line. Then when they're about to connect, they call you and bridge the call with the IRS agent. It's not a special queue - they're just using technology to handle the frustrating wait times and menu navigation for you. They're legitimate - they've been featured in business publications and have thousands of users. The service literally just connects you with the actual IRS, they don't provide tax advice themselves or pretend to be the IRS. I was speaking directly with an official IRS representative who answered all my questions about my rental property situation.

I've thought about that, but I'm worried about how to determine what exactly counts as "fair market value." Does it need to be exactly what similar properties rent for, or is there some percentage range that's acceptable? And does raising the rent just for tax purposes seem sketchy to the IRS?

Fair market value is generally what you could reasonably get if you rented the property to an unrelated tenant. You don't need to charge the absolute maximum - you just need to be in a reasonable range for comparable properties in your area. The IRS allows for some variation in what's considered market rate. Raising the rent specifically to qualify for tax treatment isn't sketchy as long as you're actually charging a legitimate market rate. It's a business decision to operate the property as a for-profit rental rather than as a personal arrangement. Just make sure you document how you determined the fair market value (comparable listings, local rental surveys, etc.) in case of questions later.

How detailed does the rental agreement need to be? Is there a template somewhere or do I need a lawyer to draft one?

That's exactly what I was worried about. This whole "not for profit" rental thing seems like a gray area that could cause problems later. Did the IRS provide any specific guidance on how they want these types of arrangements reported?

This is really concerning! Can you share more details about what the IRS agent told you during the audit? I'm in almost the exact same situation as the original poster and now I'm worried I might be handling this wrong. Did they make you amend previous years' returns too, or just going forward?

This is really helpful to know - I think a lot of people assume they can just not report below-market family rentals at all. Can you clarify what exactly you had to do to fix the situation? Did you end up having to treat it as a regular rental property going forward, or was there a specific way the IRS wanted you to handle the below-market aspect? I'm trying to figure out the safest approach for my own situation.

This is really eye-opening - thank you for sharing your audit experience! I'm curious about the specifics too. When you say you had to report the income but couldn't claim losses beyond the income amount, does that mean you reported $400/month rental income and could only deduct up to $4,800 in expenses for the year? And were you still able to deduct mortgage interest and property taxes on Schedule A, or did those have to go against the rental income on Schedule E? I want to make sure I'm understanding the correct way to handle this situation.

You're absolutely right about the conflicting information - it's really confusing when different people have had such different experiences! I'm also new to this community and dealing with a similar family rental situation with my brother. From what I'm gathering, it seems like the key might be in the details of each situation and how the IRS interprets "profit motive." The audit story definitely makes me nervous about just assuming we don't need to report anything. I think your suggestion about consulting a CPA is spot on. This seems like one of those areas where the general rules have a lot of exceptions and nuances that could really bite you if you get it wrong. Has anyone found a CPA who specializes in rental property tax issues? It might be worth the cost to get professional advice rather than risk an audit situation later. Also curious about the relationship question you raised - I've been assuming all family members are treated the same, but you're right that the IRS can be pretty specific about these definitions.