Do I need to claim rental income from my family if they live with me and are paying rent? Yes, here’s how.

by | Indy Anna, Real Estate Investing

Do I need to claim rental income from my family if they live with me and are paying rent? Yes, here’s how.

If you are getting rent from a family member then in most cases you do need to report it on your taxes.  Here’s a quick class that explains what a few of my attorneys told me about this.  For more professional help check out my Indy  Anna Indy Pros.

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Do I need to claim rental income from my family if they live with me and are paying rent? Yes, here’s how.

Indy Anna Explains…

The answer to this question.

Advice on getting your personal tax situation right.

What to expect when reporting rental income to the IRS.

These questions come up around tax time…

This question has come about over the years, usually resurfacing with each tax season. Let me be SUPER clear I’m not a tax expert and would advise you seek professional tax advice from, well a professional.  If anyone needs help finding a good tax/personal finance expert – please let me know and I will try to help you locate someone to work with.

I asked two attorneys about this.

There are more than a few people out there that collect rent from family members while sharing this ‘primary residence’ with them. There are going to be a lot of different scenarios with this too (we moved and didn’t sell our old house and my brother pays us rent, which coverages the old house’s mortgage payment, my sister only lives with me while her college is in session and pays rent about 8 months of the year, etc)- again, why it’s best to speak with a pro about your specific setup- but overall, here’s the answer;

You don’t need to necessarily report rental income with the following

There is one exception to having to claim rental income on your income taxes and that is if you are renting a space below fair market value.

Renting below fair market value means that you are charging a rent significantly lower than rents charged for other properties that are similar to your property in your area.

Typically, home owners will charge family members below fair market value rent for allowing them to stay in their home.

If this is the case, you do not need to claim the income.

However, you cannot claim any rental expenses or rental loss on your taxes.

The government considers this situation to be a “cost-sharing arrangement”.

So in some cases, it might look like this: 

Your mortgage payment is $1000.00, and you happen to live in an area where a 1% monthly rental yield is common (meaning your home’s fair market value is $100K). If you were charging a family member $300.00/month to live with you, it might not be something that you would need to report- this would be part of what could be classified by the IRS as part of your cost sharing agreement. 

This would likely mean however that you’re not going to be able to claim some things like the cost of putting in a new window AC unit in the bedroom that your family member rents as an ‘expense’ because you’re not claiming it as a rental property, rather your personal residence.

This not crystal clear.

There could be some technicalities here that (again) would be more difficult to work with if you were audited and asked about this specifically. I suppose if you were really under a microscope, and you had rented out a room in your primary residence to a family member that happened to have it’s own entrance, bathroom, and kitsch area (think mother in law’s quarters for one example), it could be said that there was no ‘common living space’ and there might be issues there.

Once again, all the more reason to be clear on this with professional help, but the overall idea is it may not be necessary to report rental income from family members in certain situations. 

We get questions like this often, so in general here’s something to always keep in mind when it comes to family paying you for anything:

– Ask yourself how would this be different if it were a stranger. For example if a stranger paid you rent every month and you lived with them that would be a roommate, if you did not live with them that would be a tenant.

– Looking at it like they are a stranger makes it is easier to see the relationship and what to do. So if a family member also cooks, cleans, etc. in exchange for rent, if they were a stranger you would still put some numerical value on that work.

– If what they are paying is way too high or if what they are getting (like the bottom bunk lol) is way outside of the range of what a “normal” person would agree to then you may have something that your accountant may say is negligible or a wash BUT if it is anything like “market rent” or anywhere near that then you want to make sure you have a clear answer and direction.

Thanks!  = )

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