‘I insisted on paying my way’: I’m 70 and pay my daughter $1,500 a month to live in her in-law suite. Her husband says the IRS wants a cut. Is he right?
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I’m 70. My wife died two years ago, and this spring I sold the house we raised our kids in and moved into the in-law suite my daughter and her husband built over their garage. I cleared $410,000 on the sale, I have $520,000 in an IRA, and I get $2,900 a month from Social Security. I am nobody’s charity case.
The suite has its own door, a small kitchen and a shower with a grab bar. I eat with them three nights a week, and my granddaughter does her homework at my table because it’s quieter than theirs.
I insisted on paying my way. My daughter looked up one-bedroom apartments nearby and they run $1,400 to $1,700 a month, so we settled on $1,500. I told her I won’t live here for free, and she stopped arguing. I write her a check on the first of the month.
Her husband is the problem. He does their taxes on his laptop every February, and at Sunday dinner he said my $1,500 makes his wife a landlord, that the IRS wants a cut of my $18,000 a year, and that I should stop paying or hand them cash instead. My daughter says it’s family money and nobody reports that. I don’t want to cost her a dime, and I won’t cheat anyone. Is he right?
Right on the principle, probably wrong on the size
Rent is income. The tax code lists rents in the section that defines gross income, and nothing exempts money from your father. So $18,000 a year for the right to live in that suite is taxable to your daughter. How much depends on one choice you make now, and the gap is about $1,579 a year.
The rule that decides it
IRS Publication 527 says a family member’s use of a space you own counts as your own personal use unless two things hold: it is their main home, and they pay a fair rental price, meaning what a stranger would pay. Your $1,500 passes: it sits inside the $1,400 to $1,700 range nearby, and the suite is where you live. The Tax Court even allows family some slack: in Bindseil v. Commissioner in 1983 it put a fair rental for a man’s parents at $360 a month against the appraiser’s $450, a 20% discount for a reliable tenant, though he still lost for lack of evidence. Keep those listings.
If the rent is fair, she reports it on Schedule E and deducts the suite’s share of the house. If the family calls it a discount instead, Publication 527 treats the year as her personal use of her own home: she still reports every dollar as other income on Schedule 1, and deducts nothing against it.
Her numbers both ways
Say your daughter and her husband earn about $150,000 together. After the $32,200 standard deduction for a couple in 2026, their taxable income is $117,800, in the 22% bracket, with room for your $18,000. They bought the house in 2015 for $350,000, and the suite is 500 of its 2,500 square feet, a fifth. A fifth of the building’s $280,000 cost depreciates over 27.5 years at about $2,036 a year, and a fifth of the property tax, insurance, utilities, repairs and mortgage interest adds $5,140: $7,176 of deductions.
| Fair rent, reported | Family discount, reported | True cost sharing | |
|---|---|---|---|
| What she reports | $18,000 | $18,000 | Nothing |
| What she deducts | $7,176 | $0 | Nothing to deduct |
| Taxable to her | $10,824 | $18,000 | $0 |
| Federal tax at 22% | $2,381 | $3,960 | $0 |
So the documented version costs her about $2,381 a year in federal tax, plus state, and she keeps $15,619 of your $18,000. The shrug-and-call-it-family version costs $3,960. Either way she is better off than if you stopped paying.
Why cost sharing isn’t open to you
Your daughter has a narrow point. When a parent simply pays for what he consumes, his groceries and his share of the electric bill, that money is reimbursement and nobody earns anything. The IRS has never drawn a bright line for families, but the test is plain: a reimbursement tracks the bills, and a rent buys the right to occupy the space. Your real costs there might be $700 a month. A flat $1,500 is $800 more than that, and you chose it because it is what a stranger would pay. Cash in an envelope doesn’t change that, and neither does calling it a gift.
The catch when they sell
Depreciation is repaid at the sale. After ten years your daughter will have claimed about $20,364 on the suite, and under Publication 523 the $500,000 home sale exclusion for a couple can’t shelter it. It is taxed at up to 25%, about $5,091. The rule counts depreciation she could have claimed even if she never did, so claim it.
The second wrinkle is that your suite has its own door and kitchen. Treasury rules can treat a self-contained apartment as a separate dwelling unit, and a fifth of the gain would then fall outside the exclusion unless they lived in that part for two of the five years before selling: on a $600,000 sale, $50,000 of a $250,000 gain, about $7,500 at 15%. The fix is cheap. Whenever you move on, let the suite be part of the house again for two years before they sell.
What I would do
Keep paying. Your son-in-law is right that the IRS wants a cut, and wrong if he thinks the answer is to hide it or stop. Have your daughter report the $18,000 on Schedule E, keep the listings and the suite’s bills, and claim the depreciation. Her federal tax comes to about $2,381 a year. Then write a one-page agreement: the rent, what it covers, who fixes the shower. Families don’t fall out over taxes. They fall out over what everybody thought was understood.
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