Multi-generational ADU living

amwright209

We're considering building an ADU on our (one-and-only) property for my in-laws to move in to. If they help pay for the ADU construction or make payments on the HELOC or help us with housing expenses once they move in, do we have to report any of their financial assistance as income? It's not exactly rent, they'd just be living with us and helping pay for things.

JanaA

Hello amwright209! Great question, and the answer really comes down to how the arrangement is structured. The IRS generally does not treat family cost-sharing as taxable income. The IRS FAQ for caregivers specifically notes that "an amount of money that your parents give you to offset their expenses isn't taxable to you." So if your in-laws are simply contributing to shared household expenses as members of your household, that is generally not reportable income.

That said, because an ADU is a separate dwelling unit, the IRS may view it differently than just sharing a home. If the arrangement starts to look like a rental, the IRS rules for renting to family members can come into play. Under those rules, if you charge fair market rent, the income is taxable but you can deduct rental expenses. If you charge below fair market rent (or nothing formal at all), the IRS treats it as personal use, meaning any payments you receive are still reportable but you generally can't deduct rental losses.

The good news is that informal cost-sharing, where your in-laws help pay the HELOC or chip in on utilities and groceries as household members, is the least likely to trigger rental income treatment. The risk increases if the arrangement is formalized as a rental with a set monthly payment specifically for the ADU. Keeping it as a shared-household, cost-sharing arrangement rather than a landlord-tenant relationship is the key distinction.