Renting to family below market: the tax hit

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: If a family member uses your rental as a home and pays less than fair rental price, each day counts as your personal use under section 280A. The property becomes a residence for tax purposes, expenses are capped at the rent you collect, and the loss you were counting on disappears. Charge fair rent to a relative using it as a main home and the property is treated as a normal rental.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). That arrangement assumes your tenant pays market rent. When the tenant is your kid, your parent or your brother at a family discount, the tax rules treat the property as if you lived there.

The rules are in section 280A and IRS Publication 527, under "Personal Use of Dwelling Unit (Including Vacation Home)."

CPA Warning Label: The discount you give your sister is also a discount on your deductions. Sometimes that is still a good deal. Just know the trade.

Fair rental price rule

Under section 280A(d)(2), you are treated as using a dwelling unit for personal purposes on any day it is used by:

• you or anyone who has an interest in it;
• a member of your family (brothers, sisters, half siblings, spouse, ancestors such as parents and grandparents, and lineal descendants such as children and grandchildren), unless the family member uses it as a main home and pays a fair rental price;
• anyone under a reciprocal arrangement; or
• anyone, family or not, who pays less than a fair rental price.

Fair rental price is the amount a person who is not related to you would be willing to pay, per Publication 527. Comparable listings are the best evidence.

So there are two separate tests for relatives: the family member must use it as their main home, and pay fair rent. Your son living there as his home at full market rent: rental days. Your son at half the market rent: personal days. A family member using it as a vacation spot, even at full rent: personal days. A cousin is not a family member for this rule, so only the fair-rent test applies to cousins.

Publication 527 also allows the main-home exception for a family member who pays fair rent under a shared equity financing agreement, where the occupant owns part of the home.

Personal use treatment

Personal use days matter because of section 280A(d)(1): you use a dwelling unit as a residence if your personal use exceeds the greater of 14 days or 10% of the days it is rented at a fair rental price.

A relative living there all year below market rent generates 365 personal days and zero fair rental days. The property is a residence for tax purposes. Consequences:

• Rental expenses are divided between rental and personal use. With no fair rental days, almost everything is personal.
• Mortgage interest and property taxes may still be deductible as itemized deductions (subject to the home mortgage interest rules and the SALT cap), but not on Schedule E.
• Publication 527 says that if you rent below fair rental price, the rental is generally not an activity engaged in for profit, so expenses can be deducted only up to the amount of rental income.

Publication 527 also notes that the rental income is still reported. You do not get to skip the rent because it is low.

Loss disallowance

The practical result: no loss. You can deduct expenses only up to the rent, and depreciation comes last in the ordering, so it is often the item that gets cut.

Illustration: Larry rents a condo to his daughter for $900 a month; market rent is $1,700. Assumptions: interest $9,000, property taxes $3,000, insurance and HOA $4,200, repairs $1,000, depreciation $7,000 a year.

Larry gives up a $3,800 loss (useful only if he can use passive losses) and the economic benefit of depreciation. He is also giving up $9,600 a year of rent, which may be a gift. Gifts of below-market rent are generally not taxable to the recipient, and the annual exclusion of $19,000 per recipient for 2026 covers this amount, so no gift tax return is likely needed, but the rent discount counts against the exclusion.

One upside: if depreciation was not allowed (because the property was not a rental), it may not reduce basis the same way. The "allowed or allowable" rule means you should check with a professional before assuming any basis outcome.

Documentation

If you do charge fair rent, prove it:

• comparable rentals from listing sites at the time the lease is signed, saved with dates;
• a written lease with market terms (deposit, late fees, term);
• rent paid by check or bank transfer, on time, every month;
• the same rent increases you would ask a stranger.

Small discounts for a reliable tenant are common in the market. Publication 527 accepts a rent that is reasonable for the area. A family discount of 10% may be defensible if you would offer it to a good unrelated tenant; 50% is not.

Why the IRS cares

Below-market family rentals are a classic audit pattern: a parent claims a large rental loss, including depreciation, on a home their adult child lives in for a token rent. The rules exist to stop the personal subsidy from becoming a tax deduction. Expect any loss on a family-occupied rental to be questioned on exam, especially when the rent is round, unchanged for years and paid irregularly, and keep the comparable-rent evidence ready.

State and local considerations

Some states and cities have rent registration or landlord licensing rules that apply even to family rentals. Property tax homestead exemptions usually do not apply when the owner does not live there, even if a relative does; check your county's rules. These do not change the federal analysis but affect the cost.

Roommate and caretaker situations

A relative who lives in a unit in exchange for managing the property, rather than paying rent, is not paying a fair rental price in cash. The value of services can be rent; Publication 527 says that if you receive services instead of money as rent, you include the fair market value of the services in income. The arrangement needs to be documented and at market, and the relative may have income for the services.

Partial years

Rules apply day by day. If your son pays fair rent and lives there as his main home from January to June, then moves out and you rent to a stranger, all of those days are rental days. If he stays on rent-free for the summer, those days are personal and count toward the 14-day or 10% test for the whole year.

When the relative stops paying

If rent stops and you let it slide, the days turn personal. Cash-basis landlords cannot deduct unpaid rent. Document any agreement in writing.

Alternatives

• Charge fair rent and gift cash separately. The rental is a normal rental. Gifts up to $19,000 per recipient per year for 2026 need no gift tax return. Note the gift and rent are separate, and the IRS could look through a circular arrangement.
• Accept the residence treatment. If you do not need the loss, below-market rent may be fine. Mortgage interest may qualify as second-home interest if you do not rent at fair value.
• Sell or gift the property. See gifting a rental to your kids for carryover basis and recapture.
• Short-term family stays at a vacation property are personal days; see vacation home rules.
• Lease with an option to buy. A relative who pays fair rent under a lease with a purchase option is still a tenant, but the terms need to be at arm's length.
• Multifamily: if you live in one unit of a duplex and rent the other to a relative, each unit is a separate dwelling unit. See multifamily vs single-family taxes.