Talk of The Villages Florida - Tax issues when renting to relatives or friends

Tax Issues when Renting to a Relative/Friend
If you are renting a home to a relative, you need to be aware of a few tax rules that could significantly affect your tax situation. If you have a rental property, you need to report on your tax return the rental income received and are allowed deductions such as, interest, repairs, utilities, association dues, supplies, insurance, real estate taxes and depreciation incurred for that property. Often the deductions will be greater than the income, causing a loss that can be deducted on your tax return against your other taxable income, such as pensions, social security, dividends and interest, and wages.
When renting to a relative, it is important that the rent charged is considered to be the fair market rental value. The IRS will not allow many of the above deductions if it considers your rental property to be rented at a lower than fair market rent, which often happens when renting to a relative. It is extremely important to document that the amount of the rent charged is the fair market rate. You can do this with newspaper want ads showing rental of similar properties in the same area. Also, web sites such as Zillow and Craig’s List can also be helpful. Do it at the time of the lease, not at the time when you are notified you are being audited.
There is good news in that you can provide good tenants with a monthly discount. Typically, relatives are good tenants as they are reliable, responsible and respectful of your property, therefore a discount can be applied. Some of my clients have pegged those discounts at about 10%.
Often times, I see clients renting to relatives without a lease. It is important to have an “arms-length” relationship with your renter, including your relative. Having a lease establishes a business relationship with the tenant, relative or not.
Lastly, I also often see clients not taking the depreciation deduction they are entitled to on their rental properties. This is a major mistake. The IRS requires depreciation to be taken when it is allowed or allowable. When you sell the property, owners are required to recapture the depreciation deduction that was taken on the property, whether or not a deduction was taken (allowed or allowable). This is a tax disaster. The IRS has provided relief from this provision by filing a request for an accounting change, Form 3115; however if you don’t file this form in a timely manner, you will be required to recapture depreciation without ever having the tax benefits of the deduction. Ouch!

FOR ASSISTANCE WITH YOUR TAX QUESTIONS, STRATEGIC TAX PLANNING OR COMPLETION OF INCOME TAX RETURN, CALL ROBERT BLOOM, CPA 425 941 5224. I meet with you in the privacy of your home and bring back your completed tax return. Reasonable rates, prompt service,reliable and trustworthy.