Tax Implications of Renting Property to Parent Below Market Rate

This is actually a really thoughtful arrangement! When renting to family members below market rate, the tax treatment depends on how the IRS classifies the property. If you rent at below fair market value (which you are at 75-80%), the property may be considered "personal use" rather than a rental property for tax purposes. This means you'd report the rental income you receive on Schedule E, but you might face limitations on how much of your expenses you can deduct against that income. Basically, the IRS doesn't want people claiming full rental property deductions when they're essentially letting family use the property at a discount. You can still deduct mortgage interest and property taxes (though possibly on Schedule A instead of Schedule E depending on how they classify it), but other expenses like insurance, maintenance, and depreciation might be limited proportionally to the discount you're providing. There's no gift tax issue here as long as you're charging a reasonable amount that covers your costs, which it sounds like you are. The IRS mainly gets concerned when people charge nominal amounts like $100/month for a property worth $2,000/month.

I went through something similar with my mother-in-law's condo last year. The tax forms were driving me crazy until I found this service called taxr.ai (https://taxr.ai) that really helped me figure out the proper way to report everything. I uploaded my lease agreement and some basic income/expense info, and it gave me a detailed analysis of exactly how to classify the property and what deductions I could take. It also pointed out that I needed to actively participate in the rental activity to qualify for certain deductions, which nobody had mentioned to me before. The analysis explained exactly which forms to use and how to document the fair market value vs. what I was charging to support my position with the IRS. Definitely made me feel more confident about my filing.

Just wanted to follow up! I tried taxr.ai after seeing your recommendation and it was exactly what I needed. My situation with renting to my son at below market rate was causing me so much confusion, but the analysis broke everything down perfectly. It clarified that in my case, because I was renting at less than fair market value but more than 2/3 of market rate, I could still claim all my expenses but needed to document everything carefully. It even generated a fair market rent analysis I can keep with my tax records in case of an audit. Seriously, what a relief to have this figured out before filing!

I've been in a similar boat trying to figure out family property tax issues, but my biggest headache was actually trying to get someone at the IRS to answer my specific questions. After waiting on hold for 3+ hours multiple times and giving up, I finally used Claimyr (https://claimyr.com) and it was a game-changer. They got me connected to an actual IRS agent in about 20 minutes. The agent confirmed that as long as I'm charging at least 70-80% of fair market value, the IRS generally considers it a legitimate rental activity rather than disguised gifting. She also walked me through exactly how to document what constitutes "fair market value" in my area to support my filing position. You can see a demo of how the service works here: https://youtu.be/_kiP6q8DX5c I honestly didn't think it would work since I'd tried calling the IRS so many times before, but it did!

Ok I'm back to eat my words. I was super skeptical about Claimyr when I commented yesterday, but I was desperate enough to try it since I needed to sort out a family property rental issue similar to the OP's situation. I had already spent over 8 hours across multiple days trying to reach the IRS. It actually worked! Got connected to an IRS representative in about 30 minutes. The agent confirmed that renting to a family member at slightly below market rate (but above 75% of FMV) is completely legitimate as a rental property for tax purposes. She also explained that I need to properly document what the fair market value is with comparable listings if I ever get audited. So yeah, I was wrong and I'm honestly shocked this service exists. Would have saved me so much frustration if I'd known about it sooner.

Something nobody has mentioned yet - make sure you have a proper written lease agreement with your parent! This helps establish that it's a legitimate landlord-tenant relationship and not just a casual arrangement that the IRS might question. My sister got audited on a similar situation because she had no formal lease with her daughter. Even though she was charging 85% of market rate, the IRS questioned whether it was actually a rental property since there was no documentation. Really caused her a headache to sort out.

Does anyone know how the mortgage interest deduction works in this situation? If I own 3 properties (my primary home, a vacation home, and my mom's rental that's below market), can I still deduct the mortgage interest on all of them? Tryin to figure out if I'm hitting some kinda limit.

One thing I haven't seen mentioned yet is the importance of keeping detailed records of all your expenses related to the property. Since you're renting at below market rate, the IRS may scrutinize your deductions more closely if you're ever audited. Make sure to track everything - property taxes, mortgage payments, insurance, maintenance, repairs, even mileage when you drive over to check on the property. If the IRS does limit your deductions proportionally (like others mentioned with the 75-80% rule), you'll want solid documentation to support every expense you're claiming. Also, consider getting a formal appraisal or at least documenting comparable rentals in your area when you set the rent. This creates a paper trail showing you made a good faith effort to determine fair market value, which helps justify your rental amount if questioned later. I learned this the hard way when my accountant couldn't find enough documentation to support my below-market family rental and I had to scramble to recreate everything during tax season.