Renting to Family Members: What You Need to Know

If you’ve recently acquired property from an inheritance, you have some important decisions to make. 

You could make it your primary residence. You might want to sell the home, take the money, and run. Or you may know someone who would be interested in renting a house—like your niece or your son.

 At first, it may seem like a good idea to rent your property to family or friends. You know them. You trust them. They’ll take care of your home. But there are matters to keep in mind, both financial and emotional, before you hand over the keys. 

Here is why renting to family or friends could be a bad idea and what to keep in mind if you go through with it.

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Pros & Cons of Renting to Family Members

Renting to family members can be a complex decision, with both advantages and disadvantages to consider.

Pros

  • Renting to family members can provide a sense of security, as you likely know them well and can trust them to take care of your property.
  • Family members may be more flexible with rental terms, such as lease duration, payment schedules, and even property maintenance.
  • Renting to family members may offer financial benefits such as steady rental income, potential tax deductions, and the ability to assist family financially.
  • Communication with family members can be easier and more comfortable, potentially leading to smoother resolution of any issues that may arise.
  • Renting to family members can strengthen family bonds and provide a support system for both parties, particularly if they’re in need of housing assistance.

Cons

  • Financial dealings can sometimes strain familial relationships, especially if there are disagreements over rental terms, property maintenance, or other issues.
  • There’s a risk that family members may take advantage of the relationship, such as by not paying rent on time or neglecting property upkeep.
  • Renting to family members can complicate legal matters, especially if issues such as eviction or lease disputes arise. It’s crucial to have a formal rental agreement in place to protect both parties’ interests.
  • Living in close proximity to family members can blur boundaries and lead to conflicts over personal space, privacy, and lifestyle differences.
  • If family members become overly reliant on you for housing, it may create financial or emotional dependency issues that can strain the relationship.

Is Renting to Family Members a Good Idea?

The short answer is no. Why? One word: drama. A landlord typically makes concessions for family members, such as not requiring an application or security deposit. This may start a slippery slope where your relative looks at the situation more casually than contractually. Meanwhile, you acquire a false sense of security because you’re not anticipating any problems from your nephew or daughter. After all, they’re family. 

But what are you going to do if your relative is late with the rent, can only pay half, or can’t pay it all? What if they cause damage to the property? What if they have loud parties and the neighbors complain? What if they want to stay longer than you anticipated? How are you going to handle those types of conflicts?

It’s better to think about those scenarios now than be confronted with the realities later. A way to avoid this tension altogether is to sell your home to a cash buyer. Instead of dealing with an ongoing situation with your relative, you get rid of the property and walk away with some money in your pocket.

How Are My Taxes Affected by Renting to Family?

You could miss out on tax deductions depending on how the property is classified. If you rent your home to a relative on any day for less than the fair rental price, that can disqualify the property as a rental. It depends on the amount. Charging up to 20% off fair-market rent is allowed under the good-tenant discount. Anything over that would classify as personal use. 

Can You Let Family Live in Your House Rent Free?

If you let your family member rent your home for free—that’s very generous of you—but you may end up having to file a gift tax return. This would be required If the fair rental value adds up to over $15,000 in the tax year, as of 2020. That breaks down to about $1,250 a month. In general, the IRS doesn’t make many people pay a gift tax unless the gift exceeds a lofty amount. The crux here is having to file a return and the possibility of paying for something you’re giving away for free. If you sell your home to a cash buyer, there’s no need to worry about property classifications and good-tenant discounts. The house is gone, and you can help your relative find another place to live.

What Happens When Renting to Family Goes Wrong?

How Would I Evict a Family Member?

Of course, you hope things don’t go that far, but what if they do? You could ask them to leave nicely. You could drop hints about other rentals in the area. But if your relative won’t budge, you have no choice; you have to get the courts involved.  

Let’s take a look at how the eviction process works:

  • The first step is serving your family member with a notice to vacate that includes when they must be off the property and why they’re being asked to leave. If their lease is not up, you can still evict for unpaid rent or breaking terms of the lease. An attorney can help you with this procedure. 
  • Next, you file an eviction petition. If the judge rules in your favor, an order of eviction will be issued as well as writ of possession that returns the property to you.
  • Finally, if your relative still hasn’t left at this point, they are in violation of a court order. You can have them removed by law enforcement. Awkward! 

Bottom line, evicting a tenant is messy enough when they’re a stranger, let alone someone you’re going to see at the next family gathering. Why make things more complicated? A cash buyer can take the home off your hands and save you the trouble of having to kick your family member out on the street.

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Best Practice for Renting to Family Members

Here’s are some best practices to follow when renting to family members:

1. Establish Clear Terms

Define rental terms upfront, including rent amount, payment schedule, lease duration, and any house rules or expectations.

2. Use a Formal Agreement

Create a written rental agreement outlining all terms and conditions to avoid misunderstandings or disputes later on.

3. Set Fair Market Rent

Charge a fair market rent to maintain financial integrity and avoid potential resentment or dependency issues.

4. Keep it Professional

Treat the rental arrangement as a business transaction, maintaining professionalism in communication and resolving issues objectively.

5. Respect Boundaries

Respect each other’s boundaries and privacy by establishing clear boundaries between landlord-tenant roles and personal relationships.

6. Enforce Rules Consistently

Apply rules and policies consistently to all tenants, including family members, to maintain fairness and avoid conflicts.

7. Seek Legal Advice

Consult with a legal professional to ensure compliance with local landlord-tenant laws and to draft a legally sound rental agreement.

8. Maintain Property Standards

Regularly inspect the property to ensure it’s well-maintained and address any maintenance issues promptly to ensure the comfort and safety of the tenant.

9. Be Prepared for the Worst

While hoping for the best, be prepared for the worst-case scenarios such as eviction proceedings.

10. Document Everything

Keep thorough records of all communications, transactions, and property-related matters to protect both parties’ interests and provide clarity in case of disputes.

Following these best practices can help foster a positive rental experience while minimizing potential conflicts or misunderstandings when renting to family members.

What Alternatives Do I Have Besides Renting to Family Members?

If you can find another tenant, it’s best not to rent your property to family—or friends for that matter. The discomfort of dealing with any problems that arise plus various tax issues could send things south quickly. Maybe you can convince your relative that buying a house is more advantageous than renting and point them toward some listings. If you are brave enough to choose this route, consider having a third-party property management company act as a buffer between you and your relative. Or find another way to deal with the property, such as listing it with a real estate agent or selling it for cash to a buyer like New Again Houses®. It’s great to be able to help out family and friends when they need a hand. Just make sure you’re being practical about the possible outcomes.