So you have taken the plunge of becoming a landlord either from Converting Your Home Into A Rental or from purchasing rental property. You have been looking around for good tenants and can’t seem to find good tenants to fill your space. Or you have relatives that are needing a space to rent. This comes up quite a bit, where a client wants to or is currently renting out their rental property to a relative. In most cases, rental properties produce losses on taxpayers returns due to the fact of being able to deduct operating costs and depreciation. Typically, the IRS does not allow a taxpayer to deduct related party losses. With rental properties there is an exception if you follow and document some simple rules.
If you rent a home to a relative that uses the home as his or her principal residence for the year and you rent the home at fair rental and not at a discount, then no limitations apply. You can deduct all the normal operating and depreciation expenses normally taken for rental properties even if they result in a loss for the year. If you do end up with a loss, however you then have to move on to the passive activity loss rules to see whether partially deductible, fully deductible, or carried over to the following year. With that being said, it is very important to set a fair rental rate. Taxpayers need to document comparable rentals in the area and also make sure they stay clear of any other perks given to the relative that would not normally be given to a third party rentor.
Following these simple steps can help a taxpayer fill an empty rental and still get the losses. But it is important to make sure they keep it fair all around. Not keeping it a fair rental can result in a situation where the income is picked up by the taxpayer, and none of the expenses are allowed. If you would like to discuss your rental situation feel free to contact us at 770-856-1309 or info@joshuawilsoncpa.com