Renting Property to a Family Member? Why Fair Market Rent Matters for Taxes
You own a rental property. Your son, daughter, parent, or another relative needs a place to live. You agree on a monthly rent that works for everyone.
Simple enough.
Then tax time comes around, and one question can change the conversation:
How does the rent you're charging compare with what an unrelated tenant would pay?
I like starting there because renting to family is not automatically a problem. The tax issue is often tied to how the property is being used and whether the amount charged represents a fair rental.
And that is something you can actually check.
If you are currently renting a property to a family member, start by running the address through our Free Rental Rate Estimator.
Then compare the estimate with what you are actually charging.
What Is Fair Market Rent?
For rental-property purposes, the IRS describes a fair rental price as generally being the amount a person who is not related to you would be willing to pay.
The IRS also states that rent is not considered a fair rental price if it is substantially less than the rents charged for similar properties in the same area.
So if you are trying to determine a reasonable market rent, you might look at things such as:
Location
Property type
Number of bedrooms and bathrooms
Square footage
Condition
Amenities
Furnishings
Utilities included in the rent
Comparable rental properties in the surrounding area
This is why simply choosing a rent amount that "seems reasonable" may not be enough—especially when the tenant is related to you.
Our Rental Rate Estimator gives you a starting point for making that comparison.
The Tax Rule for Family Rentals
The rule comes directly from Internal Revenue Code §280A(d).
Section 280A(d)(2) generally treats a dwelling unit as being used for personal purposes when it is used by certain family members of the owner.
But §280A(d)(3) provides an exception when the dwelling is rented at a fair rental to someone who uses it as their principal residence.
The IRS describes the rule similarly in Topic No. 415. A family member's use is generally considered personal use unless the family member uses the property as their main home and pays a fair rental price. The IRS also includes use by anyone paying less than fair rental price when determining personal use.
What Happens If You Charge Below-Market Rent?
Under §280A, when a dwelling is used for both rental and personal purposes, the IRS may treat part of the property as personal use if the rent is below fair rental value. When that happens, it can directly affect how your expenses are handled.
Instead of being able to fully deduct typical rental expenses—such as repairs, maintenance, insurance, utilities, and depreciation—those deductions may be limited or allocated between rental and personal use. In some cases, expenses tied to the rental activity may be reduced or disallowed entirely for the rental portion.
It can also change where certain deductions end up on your return. For example, if the property is treated as having personal-use days, some expenses that would normally be rental deductions may instead shift into Schedule A (itemized deductions), where they are subject to different limitations and only provide a benefit if you itemize.
So the impact is not just about how much rent is collected—it can also affect which expenses you are allowed to deduct, how much you can deduct, and where those deductions ultimately show up on your tax return.
Does That Mean You Can't Give a Family Member a Break on Rent?
You can decide what to charge for your property.
The important point is that your pricing decision may have tax consequences.
What Documentation Matters?
If you're relying on the position that the rent charged to a family member represents fair market rent, it is a good idea to have support for how that amount was determined.
That could include information such as:
Comparable rental listings
Rental-rate reports
Property-management estimates
Market data for similar homes
Documentation of the property's features and condition
A written lease
Records showing that rent was actually paid
The IRS generally requires taxpayers to maintain records supporting items reported on their tax returns, and well-organized documentation can be especially helpful when an arrangement involves related parties.
Start by Finding the Current Market Rent
Our free Rental Rate Estimator can give you an estimated rental value based on current comparable rental information.
If you want additional detail, you can also request the Pro Report for more information supporting the estimated rental rate.
Knowing the approximate fair market rent gives you a starting point for evaluating the tax treatment of your arrangement.
Don't Look at Rent in Isolation
The amount of rent is not the only issue that can affect a rental property.
Depending on the situation, you may also need to consider:
Mortgage interest
Property taxes
Repairs and maintenance
Insurance
Utilities
Depreciation
Improvements
Passive activity loss rules
Personal-use limitations
The eventual sale of the property
IRS Publication 527 covers the federal tax rules applicable to residential rental property, including rental expenses and properties that also have personal use.
That is also why I would not look at fair market rent in isolation when the tenant is related to you.
It is one fact that can affect several pieces of the rental-property tax analysis.
In situations like this, it is often helpful to step back and look at the full picture. We are here to help you work through those details and understand how they may apply to your specific situation.
If you are unsure how your rental arrangement should be handled, the best next step is to schedule a call with our office so we can review it with you.
This article provides general tax information and is not intended as individualized tax, legal, or financial advice. Tax treatment depends on the specific facts and circumstances of each situation.