rbynaker
Level 13
12-06-2019
11:24 PM
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The related party rules are negated if it's a fair rental amount and the related party uses the property as their principal residence. So either way seems like amending 2017 is probably in order. See 280A(d)(3):
https://www.law.cornell.edu/uscode/text/26/280A#d_3
"(3) Rental to family member, etc., for use as principal residence
(A) In general
A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person’s principal residence."
The hinge really is fair rental. Don't try to figure this out yourself, get a third party (realtor) to run some comps. This gives you the basis for a tax return position, one way or the other. I'm comfortable with a rental number that's 10% lower than the comp rate. It's easy to argue that rental to a relative comes with a lower risk and justifiably a lower rent. In the 10 - 20% discount range we have a conversation about why, and document things, but it's not out of the question. Beyond 20% discount IMO is a hard sell.
Rick
https://www.law.cornell.edu/uscode/text/26/280A#d_3
"(3) Rental to family member, etc., for use as principal residence
(A) In general
A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person’s principal residence."
The hinge really is fair rental. Don't try to figure this out yourself, get a third party (realtor) to run some comps. This gives you the basis for a tax return position, one way or the other. I'm comfortable with a rental number that's 10% lower than the comp rate. It's easy to argue that rental to a relative comes with a lower risk and justifiably a lower rent. In the 10 - 20% discount range we have a conversation about why, and document things, but it's not out of the question. Beyond 20% discount IMO is a hard sell.
Rick