IRS Rules for Renting Property to a Family Member

The IRS rules for renting to a family member turn on one question: are you charging fair market rent? If you are, and the relative uses the home as their principal residence, the property is treated like any other rental and you keep the full set of deductions. If you charge less, every day your relative occupies the property counts as your personal use, which can cap your deductions at rental income, eliminate any loss, and even create a reportable gift.

Which Relatives the Rules Actually Cover

Not every relative triggers the special treatment. For these purposes, “family” means your siblings (including half-siblings), your spouse, your ancestors (parents, grandparents, and further up the line), and your lineal descendants (children, grandchildren, and further down).¹ In-laws, cousins, aunts, uncles, nieces, and nephews are outside that definition, so a discounted rental to them doesn’t automatically create the personal-use problem that renting to a parent or child would.

The rules also reach through co-ownership. If someone else owns an interest in the property and lets a covered relative of theirs live there, your deductions can be affected too.²

What Counts as Fair Market Rent

Fair market rent is what an unrelated tenant would pay for a comparable property in the same area. The IRS says to compare properties similar in purpose, approximate size, condition, furnishings, and location.³ Rent that is “substantially less” than those comparables gets the arrangement reclassified as personal use rather than a real rental activity.

Because the IRS already assumes family deals aren’t at arm’s length, documentation carries more weight here than in most situations. Before your relative moves in, pull current listings for similar rentals nearby and save dated screenshots. A written opinion from a local real estate agent or property manager is stronger than your own research. For higher-value homes, a professional appraisal is worth the cost.

Use a written lease with the same terms you’d offer a stranger: monthly rent, due date, security deposit, maintenance responsibilities, lease duration. Collect payments by check or electronic transfer so there is a record. A handshake deal with your brother that never produces a canceled check is the fact pattern that gets reclassified.

How Personal Use Days Are Counted

Every day a covered family member occupies the property counts as your personal use day, unless two conditions are both met: the property is that family member’s principal residence, and they pay fair market rent.³ Miss either one and every day of their occupancy is tagged as personal use, even though you never set foot in the place.

An apartment rented to your mother at below-market rent is a personal-use day every day she lives there. A month at your lake cabin for your sister at token rent is a month of personal-use days.³

The Principal Residence Carve-Out

The principal residence exception is the main way to keep a family rental clean. If your daughter rents your property as her primary home and pays fair market rent, those days don’t count as personal use, and the property is treated the same as if an unrelated tenant lived there.⁴ Both elements are required. Fair rent to a daughter who uses a vacation cabin two weeks a year does not qualify, because it isn’t her principal residence.

The 14-Day or 10 Percent Threshold

Once 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, the property is reclassified as a personal residence rather than a rental.³ Crossing that line caps your rental expense deductions at your gross rental income. You cannot produce a loss to offset wages or other income.

The Under-15-Day Rule

A property rented for fewer than 15 days during the entire year sits in its own category. You don’t report the rental income, and you can’t deduct rental expenses. Mortgage interest and property taxes still work as regular itemized deductions on Schedule A.³ Useful for a vacation home a relative uses briefly; no help for a year-round arrangement.

What You Can Deduct Under Full Rental Treatment

When the property qualifies as a genuine rental (fair market rent, personal use under the threshold), the full deduction set is available: mortgage interest, property taxes, insurance, utilities, repairs, advertising, property management fees, and professional services. Depreciation on a residential rental building runs over 27.5 years under the general depreciation system.³

Those deductions can produce a net loss on paper. Whether that loss actually reduces your other taxable income depends on the passive activity rules.

What You Can Deduct When Personal Use Wins

If personal use pushes the property into “residence with incidental rental” status, you split expenses between rental and personal days and cap the rental portion at gross rental income. Any excess deductions carry forward to the next year, still subject to the same cap. The personal share of mortgage interest and property taxes still works as an itemized deduction on Schedule A, so those aren’t lost entirely.⁵ Once personal use controls, the passive activity rules don’t apply; the income cap does.³

Using Rental Losses Against Other Income

Rental real estate is generally a passive activity, so losses ordinarily offset only passive income. There’s a significant exception for landlords who actively participate in managing the property.

If you actively participate, you can deduct up to $25,000 in rental losses against non-passive income such as wages or investment earnings. Active participation is a lower bar than material participation. It means making management decisions in a meaningful way, such as approving tenants, setting rental terms, and authorizing repairs. You also need to own at least 10% of the property by value.⁶

The $25,000 allowance phases out as modified adjusted gross income rises above $100,000, dropping by $1 for every $2 over that threshold. It disappears entirely at $150,000. If you’re married filing separately and lived with your spouse at any point during the year, the allowance is zero.⁶

Gift Tax Exposure from Below-Market Rent

Charging a relative less than fair rent isn’t only an income tax issue. The IRS may treat the discount itself as a gift. Its position: if you give someone the use of property without receiving full value in return, you may be making a gift.⁷

The gift is generally the difference between fair rent and what you actually collect, added up over the year. If fair rent is $2,000 and you charge your son $500, the implied gift is $1,500 a month, or $18,000 for the year. For 2026, the annual gift tax exclusion is $19,000 per recipient, so a gift below that number doesn’t require a return.⁸ A discount above $19,000 in a year requires filing Form 709, and it counts against your lifetime gift and estate tax exemption.⁹

This exposure is separate from the rental deduction question. You can owe a gift tax filing even if the deduction rules never come into play in your situation.

The 20 Percent QBI Deduction

The Section 199A qualified business income deduction lets eligible taxpayers deduct up to 20% of qualified income from pass-through activities, including rental real estate. It was made permanent in 2025 and continues for 2026 and beyond.¹⁰ The rental has to rise to the level of a trade or business to qualify.¹¹ A family arrangement reclassified as personal use, or treated as not-for-profit, generally won’t produce QBI, since it isn’t coming from a trade or business. That’s another benefit lost when the setup isn’t clean.

Penalties and the Documentation Defense

Claiming full rental deductions on a property the IRS later reclassifies can result in an accuracy-related penalty of 20% of the underpaid tax, or 40% for a gross valuation misstatement.¹² Those stack on top of the additional tax and interest.

The defense is a paper trail. Comparable rent data, a written lease, bank records of every payment, and a log of rental versus personal days all demonstrate good faith. Reclassification hits arrangements with no records harder than arrangements with thorough records that show an honest mistake.

Where to Report It

Rental income and deductions go on Schedule E, attached to Form 1040. You list gross rents, then itemize expenses like insurance, mortgage interest, repairs, utilities, and depreciation. Schedule E also asks for the number of fair-rental days and the number of personal use days, which is how the IRS checks the personal-use limits.¹³

Under the fewer-than-15-days rule, the property doesn’t go on Schedule E at all. Deductible mortgage interest and property taxes shift to Schedule A as ordinary itemized deductions.³ Hold on to receipts, invoices, leases, payment records, comparable rent research, and any appraisals for at least three years after filing.

1
Office of the Law Revision Counsel. 26 U.S. Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
2
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.
3
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
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. Topic No. 415, Renting Residential and Vacation Property
6
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
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. Qualified Business Income Deduction
11
IRS.gov. Revenue Procedure 2019-38 – Safe Harbor for Rental Real Estate Enterprise for Section 199A
12
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
13
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss