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I bought a house that I am renting to a relative for less than the market value (she's paying about 75% of the rent market value from my appraisal, and not paying for utilities or anything else, so I'm losing around 40% per month).

I've read several articles that say that you have to charge near-market value in order to consider it a rental and claim tax deductions, but it's unclear as to what happens if you don't.

I paid all the closing costs on the purchase myself, and I'll pay the costs when I sell the property. From this perspective, this is a regular rental property for me.

I understand if I'm not allowed to take the deduction on the rental loss each month, or the depreciation, but I'm wondering about those closing costs on purchase and sale - those would translate to thousands of dollars of tax savings.

I'll talk with a tax accountant early next year, but is it possible that I can report rental income that's actually higher than I truly received, so I don't claim any rental loss, but still claim the loss of the closing costs? I'd be fudging the numbers, but in the IRS's favor, so I don't know if they would have a problem with that.

US/AZ if that helps.

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  • "I'd be fudging the numbers, but in the IRS's favor, so I don't know if they would have a problem with that." - Don't do that. Or at least, don't do that unless an accountant tells you to.
    – Kevin
    Commented Nov 15, 2016 at 4:53

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If I am not mistaken one does not write off the closing costs at the time of purchase. See here for verification.

You can write off property taxes, and you may be able to write off interest paid, but the majority of costs figure into your basis price for the house so they are not written off.

This would hold true if was a rental property or not.

As far as the first part, I think you are correct to not deduct the loss. We are in a similar situation.

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  • That link appears to be for primary, but I see your point about those additional costs being figured into the basis - so long-term they'd be "deductible" against the profit after the sale, just not this year. I didn't realize that not all closing costs were deductible - looks like the capital expenses are a small subset of the actual costs of getting that mortgage. So maybe it wouldn't even be worth it at all, to do all that work if I'm only going to be able to deduct a few hundred dollars and not until after the sale.
    – Joe Enos
    Commented Nov 14, 2016 at 21:45

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