Updated: Mar 3, 2022
You are considering renting a property that you own to a relative. Our tax laws typically require transactions to be completed at fair market value, and transactions between related parties are subject to additional scrutiny. You should be aware of the rules prior to making an agreement.
Rental expenses commonly include mortgage interest, property taxes, insurance, utilities, and repairs and maintenance. Capital cost allowance can also be deducted from rental income as long as it does not create a rental loss. All these expenses can continue to be deducted if a property is rented to a relative at fair market value. This is the amount that you would have received from an unrelated party. If you have a rental loss after deducting expenses, you can apply this loss against any other sources of income that you earn during the year.
There are restrictions if you rent the property under its fair market value and generate a rental loss. A general rule in our tax system is that there must be a reasonable expectation of profit. Renting below fair market value does not offer this and therefore is considered a cost-sharing arrangement rather than a source of income. You are not required to report the rental income received on your tax return and you can not claim rental expenses. You will ultimately be responsible for paying for the excess rental expenses and will not benefit from a tax deduction.
It is important to keep proper documentation when renting to a related party. You will need to support that the amount you are renting is at fair market value based on comparable listings in your area. It would be best to contact a real estate agent to provide you with an appraisal.
Based on the above, it is preferable from a tax and financial perspective to rent the property at its fair market value, and you should keep proper documentation to support this value. You may decide for personal reasons to rent the property below its fair market value. You will not be able to claim a rental loss if you do so. There may be other considerations as well such as change in use rules.
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