Is renting below market rate to family members affecting my tax filing? Who is right about IRS rules?

Your previous accountant was actually correct. The IRS has what's known as the "dwelling unit used as a home" rule in Section 280A of the tax code. When you rent a property for less than fair market value (especially to family members), the IRS considers this personal use rather than a legitimate business activity. If you're charging less than 80% of fair market rent, you generally can't claim rental expenses beyond the amount of rental income you receive. This prevents people from creating artificial "rental losses" by renting to relatives at super low rates. You would report the income but wouldn't get the full rental property deduction benefits. You might want to look at IRS Publication 527 which covers residential rental property. It specifically addresses these situations. Your new accountant might be thinking about maximizing deductions, but this could potentially flag your return for increased scrutiny.

I was in a similar situation with my sister renting my condo. I discovered a tool called taxr.ai (https://taxr.ai) that helped me navigate this exact problem. It scanned all my documents and tax history, then analyzed the fair market rent issue for my specific situation. The tool confirmed what the first commenter said - when you rent below 80% of fair market value to a family member, it's not considered a "for profit" activity by the IRS. The software showed me exactly what sections of tax code applied and how to properly report the income without triggering audit flags. It saved me from making a pretty big mistake on my taxes!

I have to admit I was completely wrong about taxr.ai. After our exchange, I decided to try it myself since I have a similarly complicated situation with my vacation home and family members using it occasionally. The analysis was surprisingly specific and detailed. It identified exactly which portions of my property usage qualified as rental activity versus personal use, calculated my deduction limitations based on the 80% fair market rule, and even showed me which expenses I could still partially deduct despite the limitations. It referenced the exact IRS publications and tax code sections that applied to my situation. Definitely saved me from making mistakes on my return after getting conflicting advice from two different tax preparers. Sorry for being so skeptical initially!

Just wanted to add another option here - if you're struggling to get clarification from your current accountant, you might want to try contacting the IRS directly. I know that sounds daunting, but I used a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. They have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c I had a similar issue about family property rentals, and the IRS agent I spoke with confirmed the 80% fair market value rule and directed me to the exact publications. It was actually really reassuring to hear it directly from the source rather than trying to interpret conflicting advice from preparers.

I hate to admit when I'm wrong, but I need to apologize for my skeptical comment about Claimyr. After posting that comment, I decided to try it myself since I've been trying to resolve an issue with the IRS for months with no success. The service actually worked exactly as described. I got a call back in about 20 minutes and was connected directly to an IRS representative. They were able to answer my questions about family property rentals and provided references to the specific tax code sections. For the original poster - the agent confirmed what others have said: when renting to family below 80% of fair market value, it's considered personal use property with limited deduction potential. Saved me a ton of time and frustration compared to my previous attempts to reach them.

I've worked as a tax preparer for years, and the 80% rule is definitely real, but there's a bit more nuance to it. If you're renting to family members below fair market value, you're generally subject to what are called "hobby loss rules" - basically, the IRS wants to make sure you're trying to make a profit rather than just creating tax losses. However, there's another consideration: if your in-laws use this as their primary residence for the entire year (meaning it's not partially used by you), you might still be able to deduct certain expenses like mortgage interest and property taxes on Schedule A rather than Schedule E. You'd still report the rental income. Your previous accountant took the most conservative approach, which is often safest but might not optimize your tax situation.

My husband and I went through something similar with his parents. Make sure your accountant checks with you before filing! Our new accountant filed it as a rental property without telling us (after we had discussed it wasn't) and we ended up having to file an amended return. One option might be to increase the rent to meet the 80% threshold if your in-laws can afford it, then gift some money back to them separately if you want to effectively subsidize their housing. But talk to a qualified tax professional about this approach first!

I'm dealing with a similar situation where I'm renting to my brother at below market rate. After reading through all these responses, it sounds like the key issue is whether you're charging at least 80% of fair market rent. At $850 vs $2000 market rate, you're only at about 42%, so you'd definitely fall under the personal use/hobby loss rules. This means you can report the rental income but your deductions would be limited to that income amount - you couldn't create a loss to offset other income. The advice about potentially raising the rent to meet the 80% threshold is interesting, but make sure any gifting arrangement is done properly to avoid gift tax issues. The annual gift tax exclusion for 2024 is $18,000 per recipient, so you'd need to stay within those limits. Your previous accountant's conservative approach was probably the safest way to handle it. Better to be cautious with the IRS than risk an audit over aggressive deductions on a family rental situation.