Related Party Leases

When property is owned and leased between related parties, rental rates need to be appropriate in relation to similar rental properties. Unless rent is collected at 80% of fair rental value or higher, deductions may be limited. If you are renting to a related party and they are paying less than 80% of fair rental value, deductions are limited to income. Rental income is often used as a way to transfer cash to shareholders, without paying social security taxes. Be sure there is a written lease and the terms provide for reasonable increases, if appropriate.