Tax implications of renting my house to mother-in-law below market value - help needed!

You're right to be concerned about the tax implications here. When you rent to a family member below market value, the IRS generally considers this a personal use property rather than a true rental property. Here's what you need to know: You must still report the rental income you receive from your mother-in-law on Schedule E. However, your deductions will be limited. Because it's considered personal use, you can only deduct expenses up to the amount of rental income you collect. This means if you collect $850/month ($10,200/year), your maximum deductions for mortgage interest, property taxes, insurance, repairs, etc. cannot exceed $10,200. The mortgage interest and property taxes that aren't deductible as rental expenses can still be claimed as itemized deductions on Schedule A if you itemize rather than take the standard deduction. However, other expenses like insurance, utilities, or depreciation that exceed your rental income cannot be deducted at all, nor can they be carried forward to future years.

I was in an almost identical situation last year with my dad renting my old condo. I found this amazing service called taxr.ai (https://taxr.ai) that helped me figure out exactly how to handle this on my taxes. They analyzed my rental agreement and explained that the IRS has specific rules for "family rental properties" that affect both income reporting and expense deductions. What I learned is that you have to be careful with your documentation and how you categorize the property. The tool helped me understand that since I was renting below 80% fair market value, I needed to report it differently than a standard rental. The best part was they explained exactly which forms I needed and how to fill them out in TurboTax.

Just wanted to follow up about taxr.ai that I was asking about. I decided to give it a try with my sister's rental situation and I'm honestly impressed. I was so confused about whether I needed to use Schedule E or not since I was renting below market value. The service analyzed my documents and explained that since I was renting at less than 80% fair market value to a family member, I could only deduct expenses up to the rental income amount. But they also showed me how to properly allocate the remaining mortgage interest and property taxes to Schedule A, which I had no idea about! They even explained how the 14-day personal use rule affected my situation. The guidance was way more detailed than what I found googling around, and they created a specific plan for my TurboTax entries. Definitely worth it for anyone in this family rental situation.

I had a similar issue with renting to my brother below market rate, and the most frustrating part was trying to get clear answers from the IRS. I spent HOURS on hold trying to speak with someone who could clarify the family rental rules. Then I found Claimyr (https://claimyr.com) which is absolutely brilliant. They got me connected to an IRS agent in about 20 minutes when I had been trying for days on my own. Check out how it works: https://youtu.be/_kiP6q8DX5c The IRS agent explained exactly how to report my below-market family rental and confirmed that I could still deduct mortgage interest on Schedule A for the portion not covered by rental income. Just having that official clarification gave me so much peace of mind when filing.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway since I was desperate to talk to the IRS about my own family rental situation. I couldn't believe it when my phone rang about 15 minutes later with an actual IRS agent on the line! The agent walked me through exactly how to report my below-market rental income and which expenses I could still deduct. She explained that since I'm only charging my daughter about 60% of market value, I needed to allocate my expenses differently, but could still deduct mortgage interest on Schedule A. After weeks of frustration trying to get through myself, this was a game-changer. I've already recommended it to my accountant for their other clients with complicated tax questions.

Have you considered just increasing the rent to at least 80% of fair market value? That would allow you to treat it as a true rental property and potentially benefit from claiming losses if your expenses exceed the income. At $1200-1400 market rate, you'd need to charge around $960-1120 to hit that 80% threshold. The benefits would be potentially deducting depreciation and all other expenses, which could create a paper loss you might be able to deduct against other income (depending on your income level and participation). Just something to consider if the tax benefits would outweigh the additional cost to your mother-in-law. You could always gift some of the money back to her if needed.

Does anyone know if you need to keep any special documentation when renting to family below market value? My tax person said I should have some kind of formal rental agreement even though its my dad renting from me.

I'm dealing with a very similar situation - renting to my elderly parents below market rate. One thing I learned from my CPA is that you should also document WHY you're charging below market rent. In my case, I kept records showing that my parents help with property maintenance and yard work, which justifies some of the rent reduction. Also, make sure you're treating this like a real business relationship even though it's family. I set up automatic bank transfers for the rent payments so there's a clear paper trail, and I give my parents a receipt each month. The IRS wants to see that this is a legitimate rental arrangement, not just you letting family live there cheaply. One more tip - if your mother-in-law ever stays elsewhere for extended periods, keep track of those days. If the property is vacant for more than 14 days per year due to personal use (like if she visits other family), it affects your tax calculations even more.