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I'm renting a home in the state of Missouri to my parents. We made a verbal agreement that they would pay all utilities and take care of maintenance of the house and in exchange they would get reduced rent. It wasn't until later that I realized the tax implications of this. Now the cash value itself is below the level that would be considered Fair Rent (about $300 below). However, they have, as per their agreement, contributed significantly to the upkeep and maintenance of the house. They have receipts for some larger fees (repairing the driveway), but not for a lot of the day to day things.

I understand that if the cash agreement alone were considered then this would be considered not-for-profit, that I would have to report all of this income as Miscellaneous, and that I would only be able to deduct the mortgage interest.

However, if our agreement were in writing that they agreed to pay utilities and maintenance on the home for a value of $300 per month, wouldn't I be able to consider this a fair rental price? I know that I would have to report that additional $300 per month as income, but couldn't I also use that amount as a deduction?

IRS Publication 527 Chapter 1 states:

Property or services. If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

Example.

Your tenant is a house painter. He offers to paint your rental property instead of paying 2 months rent. You accept his offer.

Include in your rental income the amount the tenant would have paid for 2 months rent. You can deduct that same amount as a rental expense for painting your property.

Chapter 5 doesn't say anything about the type of rental payment, it only states that a family member must pay fair rental price (which is defined in Chapter 1). With regards to what counts as a day of personal use it says:

  1. A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

Thanks in advance for any advice you can offer.

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    From a tax and accounting point of view it would make much more sense for your parents to pay you the money they have paid out for things like the driveway as rent, and for you to pay for the driveway to be repaired. I'm pretty sure you could do that retrospectively by writing a few receipts.
    – DJClayworth
    Feb 12, 2015 at 0:47

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The money your tenants spent on repairs and maintenance that is otherwise your responsibility is considered rent paid to you (and deductible to the extent you can deduct maintenance expenses, provided you have documentation etc etc).

The money your tenants spent on utilities, which is their responsibility anyway, is not considered rent paid to you.

Since in your question you seem to be mixing both together, it is hard to accept a claim that the additional $300 spent on utilities and maintenance is enough to bring the rent to the FMV level.

Especially since the transaction is between related persons, it may bring additional scrutiny of the IRS.

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