You can benefit in numerous ways from renting to your relatives. You already know them, so you should have a good sense whether they’re the kind of people who would blow up a kitchen and try to pass it off as a maintenance issue, or the kind that will pay the rent on time and leave the baseboards sparkling when they move. In other words, you eliminate some of the guesswork. Your family members-slash-tenants might also help you out more than the average renter, and could even, in an ideal world, inspire other tenants to behave at the same level of responsibility and courteousness.
But here’s a caution: your relatives should actually be responsible. If you have doubts, rethink any decision to have them move in. Yes, it could be awkward to turn them down, but much more awkward to withhold their security deposit, or, worse, evict them. You don’t want them to be homeless, but we’re guessing neither do you want to permanently damage your relationship.
And then there are the tax consequences, one of the most complicated parts of renting to relatives. If you charge less than fair market value (FMV), the unit counts as personal use instead of income, and you lose the ability to deduct expenses. Reduced rent could also fall into the category “taxable gift,” and the government can tax difference between FMV and what you actually charge in rent. You’re allowed to give up to $13,000 (or $26,000 together with your spouse) tax-free, however, so a gift tax would only accrue in excess of that amount. If you’re considering renting to family, talk to an accountant about the tax ramifications, because goodness knows, we’re not tax experts over here. What we can tell you is the IRS is more likely to pay attention to property managers renting to family members than it does to ones renting to strangers.
Bottom line? If you choose to rent to family members, do so as you would with any other tenant. Require the same security deposit and lease agreement, and strongly consider charging the same rent.
Was this helpful? Keep your eyes peeled for our upcoming blog post on the pros and cons of renting FROM family!