Published July 8, 2020
Why Renting to Family Is a Bad Idea and What to Keep in Mind If You Go Through with It
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 is a bad idea and what to keep in mind if you go through with it.
Is Renting to Family a Good Idea?
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.
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.
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.
What Alternatives Do I Have Besides Renting to Family?
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.