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    Reduced Rent for Family?

    Bottom line:
    What is the best way to legally rent an investment property to family at a reduced rate while keeping everything above board?

    Situation:
    My father just sold a rental in south Oregon into a 1031 trust, and is under contract for a new rental in/near his current neighborhood in central Florida. His wife's daughter (my father's step-daughter) is in a precarious mental health situation, and they want to move her out there (from CA) to live nearby them & be available to help as needed. They all want the daughter to just live in my father's rental & be done. My father is aware of the tax law enough to know that he's supposed to rent the place roughly around fair market. However, charging her fair market rents would price her out, because she can only afford roughly half of fair market.

    Ideas we've loosely tossed around (not knowing how viable they are) as options:
    1) Rent the house to her at half of fair market, do everything else normal, and accept the risk of being audited. (Bad idea, and my dad's not willing to go there)
    2) [Edit: deleted this option. With research, found that a Section 8 landlord can't rent to a relative in the Section 8 program.]
    3) Rent the house for 50% of fair market, but then my father reports the rental income but doesn't claim the normally allowable tax deductions (or perhaps the same 50% of those deductions)
    4) Charge her 75% of market rent, then in the rental agreement, state that she's being credited with another 25% of market rent in exchange for her services as a property manager with responsibility for repairs, maintenance, etc.
    5) ..... Also open to other ideas.

    ​​​​​In the end, they want to do this, they just want to be sure they do it legally. Anyone with experience or knowledge that you can offer?
    Last edited by kork13; 11-04-2021, 07:57 PM.
    "Praestantia per minutus" ... "Acta non verba"

    #2
    Not that familiar with real estate, nevertheless, I'll offer a thought. Could they leverage the $15k annual gift tax exclusion to move money to the step daughter. Perhaps then the step daughter could use those funds to make up a portion/most of the rent differential.

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      #3
      Sorry, I lack the experience and knowledge that you are looking for, but I also wondered about gift tax exclusion as a possible strategy (even if it's the reduced rent and not an actual cash transfer).

      From time to time it makes sense to consult a professional (tax expert or CPA) and pay for their services. I have a feeling this may be one of those times. Get the arrangement started off on the correct legal footing.

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        #4
        Originally posted by scfr View Post
        From time to time it makes sense to consult a professional (tax expert or CPA) and pay for their services. I have a feeling this may be one of those times. Get the arrangement started off on the correct legal footing.
        This is one of the things I've already told them... Best to seek professional advice so as to avoid doing anything that gets them into hot water, let alone accidentally voiding the tax protected status of the 1031.
        Last edited by kork13; 11-05-2021, 11:33 AM.
        "Praestantia per minutus" ... "Acta non verba"

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          #5
          If you rent up to 20% below market value you will turn it into a personal residence. Renting to family makes it not a rental. Unsure what you want to do. Different if you are accepting I believe section 8 for, because they wouldn't necessarily pay the going rate for 1 women in a 2 bd apartment with section 8.

          This is not a good idea. I've been in the situation and my mom just let it go and it was a second home that my grandparents lived there.
          LivingAlmostLarge Blog

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