Rentals and the Kiddie Tax: Paying Kids From Rental Activity

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Shifting rental income or gains to a child usually runs into the kiddie tax: for 2026, a child's unearned income above $2,700 is taxed at the parent's rate. Paying a child reasonable wages for real work is different, because wages are earned income, sheltered by the standard deduction up to $16,100 and eligible for a Roth IRA. But a rental is often not a trade or business, which changes payroll tax treatment.

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.

Rentals offer FIRE families two ideas for moving income to children in lower brackets: put some of the property or its income in the child's name, or pay the child to help. The first runs into the kiddie tax. The second can work, with care. This guide covers both under 2026 federal rules (IRS Topic 553, Rev. Proc. 2025-32 and IRS Publication 15).

CPA Warning Label: Wages must be reasonable, for work actually done, and documented. Gifting a rental moves your basis and depreciation history to the child and can trigger gift tax reporting.

The kiddie tax in 2026

The kiddie tax applies to a child's unearned income, which includes rent, interest, dividends and capital gains, when the child is under 18 at year end, or is 18 with earned income not more than half of their support, or is a full-time student age 19 to 23 with earned income not more than half of their support, and at least one parent is alive (IRS Topic 553).

For 2026:

• The first $1,350 of unearned income is offset by the child's standard deduction.
• The next $1,350 is taxed at the child's own rate.
• Unearned income above $2,700 is taxed at the parent's marginal rate, including the parent's capital gains rates for long-term gains, figured on Form 8615.

So owning a rental in a child's name, through a custodial account or a gift of a property interest, typically saves tax only on the first $2,700 or so of net income each year. Because rental net income is often reduced by depreciation, that slice can go further than it sounds, but large gains on sale will mostly be taxed at the parent's rate.

Earned income is different

Wages paid to a child for work are earned income, not subject to the kiddie tax. A dependent child's 2026 standard deduction is the larger of $1,350 or earned income plus $450, capped at the regular $16,100 single amount (Rev. Proc. 2025-32). In practice, a child can earn up to $16,100 in wages without federal income tax. Earned income also lets the child contribute to a Roth IRA, up to the lesser of earned income or the annual limit.

On the parent's side, wages are deductible only if they are ordinary and necessary, reasonable for the work, and paid for services actually performed. A 15-year-old who cleans units between tenants, handles yard work, or photographs listings can be paid what you would pay an unrelated person for the same job. A 6-year-old "managing social media" for a single-family rental is the kind of claim examiners reject.

Section 162 versus Section 212

Many long-term rentals are investment activities, not trades or businesses. Expenses of an investment rental are still deductible against rental income under Section 212 and reported on Schedule E (IRS Publication 527), so reasonable wages for real rental work remain deductible. What changes is payroll tax:

• Publication 15 says wages paid to your child under 18 by your sole proprietorship or a partnership owned only by the child's parents are not subject to Social Security and Medicare taxes, and under 21 not subject to FUTA. That exemption is written for a trade or business.
• Wages paid by an S corporation or by a partnership with non-parent partners are subject to FICA regardless of the child's age.
• If your rental is not a trade or business, check how household or non-business employment rules apply before assuming the family exemption. Some rentals, such as short-term rentals with substantial services or larger portfolios managed actively, are more clearly businesses.

Either way, issue a Form W-2, keep time logs, and pay the child by check or transfer into an account in the child's name.

Illustration

Illustration: Parents in the 24% bracket own three rentals they manage actively as a sole proprietorship trade or business on Schedule E. Their 16-year-old works 8 hours a week for 50 weeks turning over units, landscaping and keeping the mileage log, at $18 an hour, a rate comparable to local help. Wages: $7,200.

• Parents' deduction: $7,200, saving $1,728 of federal income tax at 24%.
• Child's tax: $0, since $7,200 is under the $16,100 standard deduction.
• FICA: none, if the family-employment exemption applies to this business.
• The child contributes $7,200 to a Roth IRA.

Compare gifting the child a 10% interest in one rental producing $30,000 of net income after depreciation: the child's $3,000 share is unearned. $1,350 is untaxed, $1,350 at 10%, and $300 at the parents' 24%, roughly $207 total, a saving of only about $513 over the parents' 24%, and a gift of a property interest that cannot be undone. Simplified figures.

Gifting rental property to children

• Gift tax: the 2026 annual exclusion is $19,000 per recipient per donor (Rev. Proc. 2025-32). A gift of a property interest worth more requires Form 709, though tax is rarely due given the $15 million lifetime exclusion.
• Carryover basis: the child takes your adjusted basis, reduced by your depreciation, so the built-in gain and recapture go with it (IRS Publication 551). Inherited property, by contrast, generally receives a stepped-up basis.
• Kiddie tax on sale: if a minor sells a gifted share, the gain is unearned income, mostly taxed at your rate.
• Practical control: a minor cannot hold title in most states, so gifts go through a custodial account or a trust, with legal costs and rules about when the child gets control.
• Mortgages: transferring an interest in a mortgaged property can trigger a due-on-sale clause and has its own tax effects.

Capital gains and the 0% bracket for adult children

Once a child ages out of the kiddie tax, gifted appreciated property can be sold by the child in the 0% long-term capital gains bracket, which in 2026 covers taxable income up to $49,450 for a single filer (Rev. Proc. 2025-32). Unrecaptured Section 1250 gain from depreciation is taxed at ordinary rates up to 25%, not 0%. This works best for a young adult with low income who is not a dependent subject to the kiddie tax, and it gives up the step-up that holding until death would provide.

Paying adult children and relatives

Adult children are not subject to the kiddie tax once they age out, and they can be paid wages like any other worker, but the under-18 payroll tax exemption no longer applies, so Social Security and Medicare are withheld and matched. Another route is renting a property to an adult child. That is a personal-use rental unless the child pays fair market rent and uses it as a main home, and below-market rent to family limits deductions to the rental income (Publication 527). Charging a child less than market rent to help them out is a gift that can cost you the loss deductions.

Audit and documentation

Family wages are a common audit focus. Keep a written job description, timesheets, a wage rate comparison, payroll records, W-2 and W-3 filings, and proof the money went to the child. Do not pay wages and then take the money back for household expenses. If you cannot show real work at a real wage, the deduction will likely be disallowed and the payment treated as a gift. Set the wage before the work starts, review it each year as duties change, and keep the records with your rental files for at least as long as the related returns stay open.