Can a relative convert a rental property into a home?

And even if you charge a fair-market rent to your relative, you can still unintentionally convert a rental property into a personal residence if your relative doesn’t use the property as their primary residence.

Can you rent a second home to a relative?

If you own a second home or a rental property, it’s tempting to rent it to a relative. After all, your relations can make great tenants because you know them, and they’re likely to take good care of the property.

What are the rules for renting to a relative?

Avoid making gifts to help the relative avoid the fair-market rent. If you give a good-tenant-discount, use a reasonable discount such as 10 percent. If you follow these rules, you should be in the clear about claiming valuable tax deductions for the rental property. © 2016 CBS Interactive Inc.. All Rights Reserved.

What are the benefits of renting a townhouse?

Townhouse residents always have a shared wall or even two; the buildings can have multiple floors. This gives you a taste of living in the real house, not a small apartment. Since you have your own terrace, yard, and lawn, it’s just like living in a single-family house. Of course, any rental property has certain flaws and benefits.

Can a parent convert a home to a rental?

You can convert the property to rental and claim all the expenses associated with that, as well as what your parents give you as rental income.

Who are family members that need a place to rent?

Your friends or family needing a place to rent have fallen on hard times. It may even be a more distant relative, the brother-in-law going through a divorce, the nephew that is getting out of jail, the daughter that is getting evicted, and the cousin that just lost their home.

What’s the best way to rent a home to a relative?

Sometimes parents with kids in college consider buying an investment property near the school so they can rent it to their student and friends. Others buy a vacation home and rent it back to their parents and siblings. If you own a second home or a rental property, it’s tempting to rent it to a relative.

What happens when you rent a house to a relative?

For example, you could wind up having to claim the rent you receive as income but not be allowed to claim deductions for the costs associated with the maintenance and care of the property. That’s because unless you’re careful, when renting to relatives the property can be classified as a personal residence, not as a rental.

What are the tax rules for renting to a relative?

When renting property to relatives, know the tax rules. The tax law does allow you to charge a relative a slightly lower rent based on what’s known as the good-tenant-discount. A discount of up to 20 percent has been allowed, but tax advisers generally recommend using a 10 percent discount because it’s easier to justify.

When does an owner or relative have to move in?

The owner or relative should move into the unit within three months and intend to occupy the unit as that person’s principal residence for at least 36 continuous months. If a comparable unit owned in the same building is vacant or becomes vacant during the period of the notice terminating tenancy, then the notice must be rescinded.

What are the tax implications of renting a house to a relative?

However, since all of the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion is zero. So none of the expenses are deductible, other than property taxes and mortgage interest, assuming the interest would otherwise qualify as second home mortgage interest.

How is a rental property treated as a principal residence?

When a taxpayer rents a home to a relative for long-term use as a principal residence, the tax treatment of the rental depends upon whether the property is rented at fair rental value or rented at less than the fair rental value.