IRS Rules for Renting Property to a Family Member

The IRS rules for renting to a family member come down to one principle: charge fair market rent and treat the arrangement like any other tenancy, or lose most of your rental tax benefits. Renting to a relative is legal and common, but the tax code treats below-market family rentals as personal use of the property, which can wipe out your rental deductions and, separately, create a gift tax reporting obligation.¹

Which Relatives the Rules Actually Cover

Not every relative triggers the special scrutiny. For these purposes, “family” means your siblings (including half-siblings), your spouse, your ancestors (parents, grandparents, and so on), and your lineal descendants (children, grandchildren, and so on). In-laws, cousins, aunts, uncles, nieces, and nephews fall outside the definition, so renting to them at a discount doesn’t automatically create a personal-use problem the way renting to a parent or child does.²

The rules also reach co-owners. If you share a rental with a business partner and that partner lets their daughter stay below market rate, your deductions can be affected along with theirs.³

What Counts as Fair Market Rent

Fair market rent is what an unrelated person would pay for a comparable property in the same area. The IRS says comparable properties should be similar in purpose, approximate size, condition, furnishings, and location.¹ If what you charge is “substantially less” than those comparable rates, the IRS treats the arrangement as personal use rather than a real rental activity.

Documentation matters more here than in most tax situations, because the IRS already suspects family deals aren’t at arm’s length. Build the paper trail before your relative moves in:

Pull current listings for similar rentals nearby, and save screenshots or printouts with dates.
Get a written opinion from a local real estate agent or property manager; it carries more weight than your own informal research.
For higher-value properties, pay for a professional appraisal.
Use a formal written lease with the same terms you’d give any tenant: monthly rent, due dates, security deposit, maintenance responsibilities, and lease duration.
Collect rent by check or electronic transfer so there’s a bank record.

A handshake deal with your brother that never produces a canceled check is exactly what triggers reclassification.

Personal Use Days and the Principal Residence Exception

The IRS counts every day a covered family member occupies your property as a personal use day for you, unless two conditions are both met: the property is the family member’s principal residence, and they pay fair market rent.¹ Miss either condition, and every day of occupancy counts as personal use, even though you never set foot in the place yourself.

Example: your mother rents your apartment at a discount. Every day she lives there is your personal use day. Same result if a sibling spends a month at your vacation property and pays token rent.¹

The principal residence carve-out is the most important one. If your daughter rents the property as her primary home and pays fair market rent, those days do not count as personal use. The property is treated the same as if an unrelated tenant lived there.⁴ Both elements have to be there. Charging your daughter fair rent on a vacation cabin she uses two weeks a year does not qualify, because it isn’t her principal residence.

The 14-Day / 10% Threshold

Your property gets reclassified as a personal residence (rather than a rental) when your personal use days exceed the greater of 14 days or 10% of the days the property was rented at a fair price during the year.¹ Crossing that line caps your rental expense deductions at your gross rental income, so the property can’t generate a loss to offset wages or other income.

What You Can Deduct in Each Scenario

When the arrangement qualifies as a genuine rental (fair market rent, personal use below the threshold), you can deduct mortgage interest, property taxes, insurance, utilities, repairs, advertising, property management fees, and professional services. Depreciation on a residential rental building is spread over 27.5 years under the general depreciation system.¹ These deductions can produce a net loss, and if you actively participate in managing the property, up to $25,000 of that loss can offset non-passive income like wages, subject to income-based phase-outs starting at $100,000 of modified adjusted gross income.⁵

When personal use pushes the property into “residence with incidental rental” status, the picture changes. You split expenses between rental and personal days based on usage, and rental deductions are capped at gross rental income. The property cannot produce a loss on your return.⁶ There’s a required order: deduct the rental share of mortgage interest and property taxes first, then operating expenses like insurance, utilities, and repairs, then depreciation. If you hit the income cap before reaching depreciation, the unused portion carries forward to the next year, still subject to the same cap.¹

The personal portion of mortgage interest and property taxes can still be claimed as itemized deductions on Schedule A, so those aren’t lost entirely.⁶

One edge case: if the property is rented out fewer than 15 days during the whole year, you don’t report the rental income and you can’t deduct rental expenses, but mortgage interest and property taxes stay deductible on Schedule A.¹ This rarely helps a year-round family arrangement.

The Gift Tax Angle Most Landlords Miss

Charging a relative less than fair market rent doesn’t just hit your rental deductions. The IRS may treat the discount itself as a gift. The agency’s position: if you give someone the use of property without receiving full value back, you may be making a gift.⁷

The gift amount is generally the gap between fair market rent and what you actually charge, totaled over the year. If fair market rent is $2,000 and you charge your son $500, the implied gift runs $1,500 per month, or $18,000 for the year. For 2026, the annual gift tax exclusion is $19,000 per recipient, so a gift under that amount wouldn’t require filing anything.⁸ Cross $19,000 and you have to file Form 709, which counts the excess against your lifetime gift and estate tax exemption.⁹

Gift tax exposure is a separate issue from the income tax consequences. You can owe a reporting obligation on the discount even in situations where the deduction limits don’t particularly hurt you.

Reporting and Penalties

Rental income and expenses go on Schedule E (Supplemental Income and Loss), attached to Form 1040.¹⁰ You report gross rental income and itemize expenses, and the form asks for the number of days rented at fair market value and the number of personal use days. That’s how the IRS checks whether the personal-use limits apply.

Claiming full rental deductions on a property the IRS later reclassifies as personal use can trigger an accuracy-related penalty of 20% of the underpaid tax. A gross valuation misstatement doubles that to 40%.¹¹ These penalties come on top of the additional tax plus interest.

Keep receipts, invoices, lease agreements, and payment records for at least three years after filing. For a family rental, hold onto the comparable-rent research and any appraisal as well. If the rental produces losses you carry forward, keep the records until three years after the year you finally use those losses. Thorough documentation is what separates an honest arrangement from one the IRS will unwind.

1
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
2
Office of the Law Revision Counsel. 26 U.S. Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
3
Office of the Law Revision Counsel. 26 U.S. Code 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
4
Office of the Law Revision Counsel. 26 U.S. Code 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. – Section (d)(3)(A)
5
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
6
Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
7
Internal Revenue Service. Gift Tax
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
9
Internal Revenue Service. Instructions for Form 709
10
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
11
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments