Renting to a relative can have a happy ending. A little advance work can make renting a home or a room to a family member a plus for all involved, if you follow a few important rules. You will need to consider how to best protect your financial interests, the importance of a legal agreement and how to survive the experience with your relationship intact. Leave nothing to chance. Renting your property to someone, even a relative, is a business and financial transaction. Build the proper framework from the beginning and avoid conflict.
Registering Rental Property
Local governments, usually counties, require homeowners to register residential rental properties. The rules for registering residential property rented to relatives may differ. For instance, Baltimore County in Maryland does not require homeowners to register residential property rented to relatives, with certain conditions. Maricopa County, Arizona, requires homeowners to register rental property even when the tenants are relatives, however.
Discuss and Agree
Agree with your family member that the rental of your property is a business transaction. Discuss expectations, responsibilities and proper handling of normal landlord-tenant communications, such as repairs. Discuss how long the arrangement is to last and make it clear that there will be a legal agreement for the tenancy. Avoid discussing the arrangement with other family members; keep the family member’s financial information private and avoid taking liberties you would not take with a non-relative. Getting this out in the open early helps prevent misunderstandings or involving other family members.
Charge Fair Market Value Rent
You will have to charge your relative fair market value rent if you intend to deduct expenses from your rental income when you file taxes. The Internal Revenue Service allows the deduction of certain expenses -- such as maintenance, insurance, real estate taxes and mortgage interest -- from your reported rental income. The deductions reduce the amount of your rental income and lower the amount of taxes you owe.
Property that is not your residence and that you rent to make a profit can yield deductible expenses that exceed your gross rental income. If you charge your relative less than the fair market value for comparable housing in your area, you risk having your property classified as a second home. This means you will not qualify for the deductions. Document the fair market value rent amount in your area.
Sign a Lease
It might be difficult to ask a relative, especially a close family member such as a sister or parent, to sign a lease, but the lease will protect both you and your family member and possibly save your relationship if problems arise. Without a lease, you have no leverage to enforce any agreement you might have with your relative.
Treat this lease as you would for any other tenancy, and detail the terms of your agreement, including rent amount, when rent is due, rules about smoking and pets, who can live in the property and when the lease ends. Signing a lease helps frame your landlord-tenant relationship with your family member as a business transaction.
- Baltimore County, MD: Rental Registration Frequently Asked Questions
- Maricopa County: Residential Rental Property Registration
- Forbes: Tax Rules for Renting to a Relative
- Internal Revenue Service: Topic 415 -- Renting Residential and Vacation Property (Formerly Renting Vacation Property and Renting to Relatives)
- Rules to Subletting Your Apartment
- Things to Remember When Renewing a Lease
- Can I Deduct Rent Without Receipts?
- How to Have Parents Co-Sign for an Apartment
- How to Become a Landlord & How It Affects Your Taxes
- Good Questions When Checking References for Housing
- How to Buy a House Specifically to Rent it Out for Profit
- HUD Regulations on Evictions