Renting to your relatives
This can be a way to get wonderful tenants you already know. There are also hazards as well.
Renting is and must remain a business arrangement. This is true whether your tenant is your college-age child or your in-laws. It is particularly important to maintain a clear understanding of what is and isn't permitted. Be sure to set down ground rules and fair market terms for the rental. How do you maintain an arms length transaction so the IRS will respect the rental?
- Be sure to have a formal rental agreement the same as you would maintain with a third party should be signed and dated at the time the rental begins and should be updated as needed.
- Charge a reasonable fair market value rent. Document fair value by retaining copies of listings of similar size and type properties in your area which show the listed rent. You could also obtain letters from property managers regarding what they determine is a fair rental price.
- Record income and expense related to the property the same as you would if the property were rented to a third party.