Fair market rent on her backyard home is $3,200 a month. Her son pays $800.
That’s a $2,400 gap, every single month, by choice.
It’s not an accident, and it’s not a family member taking advantage of a soft touch. It’s a deliberate decision, and it’s one a lot of families quietly make without ever running the actual numbers on what it costs.
The numbers below reflect a realistic Los Angeles scenario built from real market rent data, not one specific client’s finances, since this is a decision plenty of families are quietly making the same way.
What the Gap Actually Costs
$2,400 a month is $28,800 a year. Over ten years, that’s $288,000 in rent she could have collected and didn’t.
Said differently: this isn’t a story about giving up housing income. It’s a story about giving up most of it, on purpose, for a specific reason.
Put next to a market-rate rental, the gap is stark. A backyard home renting at full market value in this scenario would generate close to that $288,000 over a decade before even counting the loan being paid down along the way. Choosing $800 instead means walking away from the majority of that, with eyes open, in exchange for something the spreadsheet doesn’t capture on its own.
Why She Does It Anyway
The $800 isn’t nothing. It’s enough to cover utilities, upkeep, and a portion of what the unit actually costs to carry, without pretending the arrangement is charity.
What the discount actually buys is her son’s ability to save. At $800 a month instead of $3,200, he’s keeping $2,400 a month that would otherwise go to a landlord, money that can go toward a down payment, debt, or just financial breathing room most people his age don’t have. From his side, that $2,400 a month is the exact same number as her forgone income, just flowing in the opposite direction.
Neither side of that trade is “losing” $2,400. It’s the same $2,400, staying inside the family instead of leaving it entirely.
Compare that to a family with an empty backyard collecting no rent at all. That family is out the full $3,200 in potential income every month, with nothing coming back on either side. This family is only out $2,400 of it, and the other $2,400 is landing directly in their son’s savings account instead of a landlord’s. Framed that way, the discount looks less like a loss and more like a transfer, from one generation’s rental income to the next generation’s down payment fund.
The Tax Rule Nobody Mentions
Here’s the part that rarely comes up in these stories, and it’s worth knowing before doing this yourself. When you rent to a family member for meaningfully less than fair market rent, the IRS generally treats that as personal use of the property rather than a genuine rental, even though real rent is genuinely changing hands every month.
What that means in practice: the rental income still has to be reported, but expenses like depreciation, repairs, and other typical rental deductions generally can’t be used to create a loss beyond the rent actually collected. At $800 a month against $3,200 fair market rent, that’s charging 25 percent of market rate, well outside the range the IRS treats as a normal, if generous, rental arrangement.
There’s a bit of room built into the rules. Some tax professionals point to a modest “good tenant” discount, generally up to around 10 percent off fair market rent, that can still preserve standard rental tax treatment. $800 against $3,200 is nowhere close to that range, which is exactly why this arrangement gets classified differently than a typical below-market discount.
None of this means the arrangement is a bad idea. It means the tax benefits of owning a rental property largely don’t apply here, which is a real trade-off worth knowing about, not an afterthought.
Is There a Middle Ground?
For families who want the financial help to flow to a family member without giving up rental tax treatment entirely, charging closer to that 90-percent-of-market range keeps the arrangement inside the lines the IRS treats as a real rental, while still meaningfully discounting the rent.
In this scenario, that would mean something closer to $2,900 a month instead of $800, which defeats the point for a family specifically trying to help an adult child save aggressively. The math here isn’t really about optimizing for tax treatment. It’s about deciding how much of that $2,400 gap is worth giving up entirely for what it does for the person living there.
There’s no universally correct answer here, and that’s worth saying plainly. A family focused on maximizing their own return picks the 90-percent range. A family focused on maximizing what their kid can save picks something much closer to $800. Both are legitimate goals, they just aren’t the same goal, and the rent number that’s “right” depends entirely on which one actually matters more to the people making the decision.
When Charging Closer to Market Makes More Sense
This arrangement fits a specific situation: a family with enough other income or equity that the forgone rent doesn’t create financial strain, housing a family member who genuinely benefits from the savings, for a period with a real endpoint in mind.
It fits less well for a family relying on that rental income to cover the loan payment on the unit itself. If the numbers only work with rent closer to market rate, a steep family discount can turn a self-sustaining project into one the rest of the household budget has to prop up every month.
What This Means for Your Own Property
If you’re weighing housing a family member against renting at market rate, the honest first step is running both numbers for your specific situation, not assuming one is automatically the right call. A family in a similar spot chose to keep their daughters at home entirely rent-free rather than at a discount; that story walks through a different version of this same trade-off. Our ADU construction team can help you think through what a unit on your property could realistically produce at market rate, so you know exactly what you’re choosing to give up if you decide to discount it for family.
Frequently Asked Questions
Is it smart to charge a family member way below market rent?
It depends on what you’re optimizing for. Financially, it means giving up real rental income, but it can meaningfully help a family member save money, which is a real value even though it doesn’t show up as income on your side.
Do I have to report rental income from a family member paying below market rent?
Yes. The income still needs to be reported, even when it’s below fair market value and even when the IRS treats the arrangement as personal use rather than a standard rental.
How much can I discount rent to family before it affects my taxes?
There’s no single hard number, but many tax professionals point to roughly 10 percent below fair market rent as a reasonable “good tenant” discount that still preserves standard rental tax treatment. Steeper discounts risk being treated as personal use.
What expenses can I still deduct if I charge below-market rent to family?
Generally, deductions are limited to the amount of rental income actually received, meaning you typically can’t use expenses to create a loss the way you could with a property rented at full market value.
Is renting to family below market the same as losing that income?
Not exactly. The forgone rent doesn’t disappear, it effectively transfers to the family member as savings. It is real forgone income for the property owner, but it isn’t wasted money in the way an actual financial loss would be.
Should I charge my kid market rent instead of a discount?
That depends on your goals. Market rent preserves standard rental tax treatment and maximizes your income; a discount sacrifices both of those in exchange for helping a family member save more directly.
Does this arrangement affect the property’s value the same way a market-rate rental does?
The property itself still gains value from being a legal, permitted unit regardless of what rent is charged. What changes is the income side of the return, not the underlying appraised value.
Would you give up $2,400 a month in rent to help your kid save it instead? Or does it make more sense to charge closer to market and help them a different way?
