Rental Property - Fair Market Value thresholds for tax purposes when renting to family
I'm planning to rent out my house in a few months and I'm trying to figure out the tax implications. One option I'm considering is renting to a family member at a reduced rate. My question is: how much of a discount can I give before the IRS stops considering it a rental property and starts classifying it as personal use? Based on my research, I know there's a threshold for fair market value, but I'm not clear on exactly what percentage I need to stay above. The current market rate for a property like mine would be around $2,700 per month. My monthly PITI+HOA expenses come to about $1,900. For instance, if I offered a 20% discount ($2,160/month), would the IRS still view this as a legitimate rental that gets reported on Schedule E? Or would this discount be too steep, forcing me to report it on Schedule 1 instead? I've already done some reading about the different deduction rules between the two schedules. I just need help determining at what point I should be using one versus the other. Has anyone dealt with this situation before?
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Juan Moreno
The IRS generally considers a property a rental if you charge at least 80% of fair market value (FMV) when renting to family members. If you rent for less than that, it's typically considered personal use, which changes how you report the income and expenses. At $2,160/month (which is 80% of your $2,700 FMV), you'd be right at the threshold. To be safe, I'd recommend staying slightly above that - maybe 82-85% of FMV to give yourself a small buffer in case the IRS questions your fair market value assessment. If you meet the 80% threshold, you'd report on Schedule E as a rental property, allowing you to deduct expenses like mortgage interest, property taxes, insurance, maintenance, and depreciation against your rental income. If you fall below 80%, it's considered personal use, and you'd report the rental income on Schedule 1, with more limited deduction options.
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Savanna Franklin
•Thanks for the clear explanation! So if I understand correctly, I need to charge at least 80% of FMV to qualify for Schedule E reporting. Is there any official documentation from the IRS that specifically states this 80% threshold? I want to make sure I'm following the exact rules. Also, do you know if I need any special documentation to prove the FMV of my property if I get audited?
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Juan Moreno
•The 80% rule is actually found in IRS Publication 527 under the "Dwelling Unit Used as a Home" section. Basically, if you rent to a family member for less than 80% FMV, the IRS considers the property a personal residence rather than a rental property. For documenting FMV, I recommend getting written estimates from 2-3 local real estate agents or property management companies. You could also compile listings of similar rentals in your area with comparable features, square footage, and location. Save screenshots of these listings along with dates. Having this documentation will be invaluable if you're ever questioned about your rental rate determination.
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Amy Fleming
After struggling with a similar situation renting to my brother, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me navigate all the rental property tax rules. It analyzed my specific situation and clarified exactly where that 80% threshold comes from and how to document fair market value properly. The tool asks questions about your specific property, location, and rental agreement, then gives you personalized guidance. It even helped me understand how to properly document the fair market value to support my position if I ever got audited. Really made me confident in the approach I was taking.
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Alice Pierce
•How exactly does taxr.ai determine the FMV for your property? Does it use comps in your area or do you have to provide that information yourself? I'm in a somewhat unique neighborhood where prices vary a lot.
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Esteban Tate
•I'm skeptical about these online tools... couldn't you just Google the 80% rule? Why pay for something when this info is freely available on IRS.gov? Did it actually tell you anything you couldn't find yourself?
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Amy Fleming
•It doesn't determine the FMV itself - you provide that information based on your research. What it does is walk you through the proper documentation process so you have solid evidence of how you arrived at your FMV calculation. It helped me understand what kinds of properties actually count as comparable and what features to consider. I initially thought the same thing about just Googling, but the value was in the personalized guidance for my specific situation. It pointed out considerations I hadn't found in my own research, like how the length of the lease affects documentation requirements and specific deductions I qualified for based on my property type and relationship to the tenant. The step-by-step guidance saved me hours of research and probably some mistakes.
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Esteban Tate
Honestly, taxr.ai was worth it for me. I was skeptical too (as you can see from my comment above) but I decided to give it a try after getting contradictory advice from different tax preparers about my rental to my cousin. The tool guided me through exactly what documentation I needed for my FMV calculation, helped me understand what percentage discount I could safely offer, and showed me which expenses I could still deduct even though I was giving a family discount. It actually saved me from making a costly mistake - I was about to rent at 75% of FMV not realizing I'd lose all those Schedule E deductions! What really impressed me was the detailed explanation of how to handle repairs vs. improvements for a property rented to family. That alone was worth it since I was planning some updates before renting.
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Ivanna St. Pierre
If you're having trouble getting through to the IRS for clarification on these rental rules, I'd recommend Claimyr (https://claimyr.com). I spent DAYS trying to reach someone at the IRS to get a definitive answer about my rental situation with my sister-in-law. Found Claimyr and they got me connected to an actual IRS representative in about 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed the 80% rule and gave me specific guidance on how to document fair market value for my situation. They also explained some nuances about mixed-use that weren't clear from the IRS publications. Totally worth it for the peace of mind knowing I'm doing things correctly.
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Elin Robinson
•How does this actually work? I've called the IRS like 20 times about rental property questions and always get disconnected after waiting forever.
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Atticus Domingo
•This sounds too good to be true. The IRS is notorious for long wait times. Are you saying this service somehow lets you jump the queue? That seems fishy. And do they have access to your personal tax info?
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Ivanna St. Pierre
•It basically calls the IRS for you and navigates the phone tree, then alerts you when an actual human is about to pick up. No magic queue-jumping - they just handle the frustrating waiting part. They don't have access to any of your tax information. They just connect the call and then you talk directly with the IRS agent. It's like having someone wait on hold for you. I was skeptical too, but when I got connected to an actual IRS agent who answered all my specific questions about family rental documentation, it was absolutely worth it.
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Atticus Domingo
I have to apologize for my skepticism about Claimyr. After posting that comment, I decided to try it since I had some questions about my rental property that I couldn't get clear answers on. It actually worked exactly as described. I received a call back when an IRS agent was about to pick up, and I was able to ask specifically about documentation requirements for proving fair market value when renting to family. The agent explained that having comparable listings from the time I established the rental agreement, along with notes about any differences between my property and the comps, would be sufficient. The agent also confirmed the 80% rule and explained some exceptions I hadn't found anywhere online. Definitely changed my perspective on dealing with the IRS!
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Beth Ford
One thing nobody's mentioned yet is that you should also check your state and local tax rules! I rented to my daughter at about 80% FMV thinking I was fine based on federal rules, but my state has a 90% requirement for it to be considered a legitimate rental property for state tax purposes. Ended up having to file differently on my state return than my federal return which was a huge headache. Some states also have different documentation requirements for proving the property is truly a rental when family is involved.
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Savanna Franklin
•That's a great point I hadn't considered at all! Do you know where I would look up the requirements for Florida? Is there a specific state department or website that would have this information?
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Beth Ford
•For Florida, you'd want to check the Florida Department of Revenue website. Look for sections on property rental or "rent from family members" specifically. Florida doesn't have state income tax, but there could still be property tax implications depending on how the property is classified. You might also need to check with your county tax assessor because some counties have their own rules about homestead exemptions and how they're affected when you rent to family. In some Florida counties, you could lose property tax benefits if the property isn't considered a true rental. Each county handles this differently, so definitely worth a call to your local tax assessor's office.
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Morita Montoya
Has anyone dealt with the "14 day rule" along with the family rental situation? I'm planning to use my rental property occasionally throughout the year (less than 14 days) while also renting to my nephew. Not sure if this complicates the 80% FMV requirement.
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Kingston Bellamy
•The 14-day rule still applies, but it makes documentation even more important. If you use the property yourself for 14 days or less (or 10% of the days it's rented, whichever is greater), you can still treat it as a rental property assuming you're charging at least 80% FMV to your nephew. Just make sure you keep extremely detailed records of exactly which days you personally used the property. The IRS scrutinizes family rentals with personal use much more carefully. Document everything!
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Morita Montoya
•Thanks for the input! That makes sense about the documentation. I'll be sure to keep a detailed calendar of when I use the property versus when my nephew is there. Definitely don't want to trigger any red flags with the IRS!
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Jamal Brown
Something else to keep in mind is that the IRS also looks at the terms of your rental agreement when determining if it's a legitimate rental. Even if you're charging 80% of FMV, if your lease agreement with your family member is too informal or doesn't include standard rental terms (like security deposits, maintenance responsibilities, eviction clauses), the IRS might still question whether it's truly a rental arrangement. I'd recommend drafting a formal lease agreement that you'd use with any tenant - specify the monthly rent, security deposit requirements, who's responsible for utilities and maintenance, lease duration, and termination conditions. Treat it like a business transaction even though it's family. This documentation will support your position that it's a legitimate rental if you're ever audited. Also, make sure you're actually enforcing the lease terms. If you let your family member skip payments or don't follow through on lease provisions, that could undermine your argument that it's a true rental property.
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Nathaniel Mikhaylov
•This is excellent advice about the formal lease agreement! I hadn't thought about how the informality of the arrangement could work against me. You're absolutely right that even at 80% FMV, the IRS could still question the legitimacy if it doesn't look like a real rental business. I'm curious - what happens if a family member does miss a payment or two? Obviously we'd want to avoid that, but life happens. Is there a certain threshold where occasional missed payments wouldn't jeopardize the rental classification, or does any leniency automatically make it look like personal use? Also, do you know if the security deposit needs to be at market rate too, or just the monthly rent? I was thinking of asking for a smaller deposit since it's family, but now I'm wondering if that's a mistake.
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