I think
Chapter 5 of IRS Publication 527 would be useful here. It lays out what is considered "personal use" of a property.
If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Only your rental expenses may be deducted on Schedule E (Form 1040). Some of your personal expenses may be deductible on Schedule A (Form 1040), if you itemize your deductions.
You must also determine if the dwelling unit is considered a home. The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year.
What is a day of personal use? A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
- You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Days used as a main home before or after renting , later.
- A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
- Anyone under an arrangement that lets you use some other dwelling unit.
- Anyone at less than a fair rental price.
Based on this, it seems like your current arrangement of offering below-market rent to your family members means that the house is actually considered a second "home." You do seem to be treating it that way on your taxes as well.
hoping2retire35's suggestion is interesting. It looks like if you did charge your family a fair market rent, and you did not live in the home yourself, you could consider treating this house as a rental property on your tax return instead of a second home. Separately, you can give family members (or anyone else) gifts of up to $14k/year without filing gift tax forms at all. I offer no opinion on whether the IRS or the tax code would agree that these two things can be combined in this manner.
Supposing this is legit, what would the potential benefit of this arrangement be? If you "
actively participated" in the rental activity and your MAGI is below $100,000, you may deduct the first $25,000 of rental losses from your AGI. Would you have a rental loss? Possibly. You would have to report the full fair-market rent, but you would get to deduct all expenses from this, including property tax, insurance, maintenance, mortgage interest, and even depreciation on the building. If this all comes out to a loss, you could then deduct this amount from your AGI, otherwise it would count as income. If you wouldn't have a loss in a typical year, then you're probably better off with the current situation where you treat it as a second home, report no income from the below-market rent your family pays, and deduct certain expenses on Schedule A.
Of course this would all be for future years. You didn't actually charge fair-market rent last year, so this wouldn't help you get the 2015 saver's credit.