Author Topic: Renting to a relative (U.S., California)  (Read 1730 times)

Eilonwy

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Renting to a relative (U.S., California)
« on: November 28, 2019, 03:25:22 PM »
A few years ago we converted our garage into a studio unit, intending it for our disabled child, who is now old enough to move in.

From what I've read, if we do this as a rental, we get a lot of good tax breaks. The catch is, our (adult) child can't possibly pay anything close to market value, which, again from what I've read, would make it a personal use situation, and hence no benefits. It's a very high rent neighborhood.

Benefiting our child is our number one priority, but I wonder if anyone has any thoughts on the best way to do this for all of us. I'm not sure we should even charge rent, if we're going to be taxed on it without any of the landlord tax breaks. 

Incidentally, the rental is under our home mortgage, which is close to paid off. And we're unlikely to move.

LaineyAZ

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Re: Renting to a relative (U.S., California)
« Reply #1 on: November 28, 2019, 05:08:38 PM »
I'm renting a small house to a relative.  I'd definitely speak with a tax accountant.  Seems like if you don't charge market-rate rent then the difference is considered income to the relative. 
In my case we didn't delve into that because the rent is close enough that it hasn't been an issue, but I'd look into the tax ramifications first.

Eilonwy

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Re: Renting to a relative (U.S., California)
« Reply #2 on: November 29, 2019, 01:41:24 AM »
Ack, that's an unnerving thought. I wouldn't think so if it's considered personal use, but I guess best to make sure.

SeattleCPA

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Re: Renting to a relative (U.S., California)
« Reply #3 on: November 30, 2019, 08:44:14 AM »
Ack, that's an unnerving thought. I wouldn't think so if it's considered personal use, but I guess best to make sure.

The below market rent days get counted as personal days per Section 280A(d)(2)(c), which if you rent all year means the rental has 100% personal use.

That means you'll get to deduct some expenses but not many. Here's the IRS webpage that explains.

https://www.irs.gov/publications/p527#en_US_2018_publink1000219175