Renting Property to Family Question

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garyt

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So I own a house my Dad was living in until he passed away last November. The house is sitting empty as I have no intention of becoming a landlord. We can't sell it yet because we're keeping our income low for ACA coverage for one more year until my wife turns 65.
I have a niece that would like to move in for a year to save for a house. We would not charge her rent. I am under the assumption that even if I allow her to live there for free I'd still have to show the going rate for rent in the area as income? I believe I read this 15 or so years ago when I bought the house for my parents. I put my Dad's name on the deed with mine so he'd be co owner. Is this true? I get why they'd do that because anyone could say they're not charging rent and avoid the taxes.
It still kind of stinks that you can't help a family member out with your own property if this is true.
 
You should have gotten a basis step up in the house, so unless there has been a big increase since Dad's death, you should not have a significant gain. Just sell it. (Edit: I missed the point that it was not Dad's house that you inherited, right? Sorry.)

Re niece, IMO it is a very bad idea to rent to family. What if she loses her job or just chooses not to pay her rent? Or she brings in a boyfriend or moves out to live with a boyfriend? Or she stops paying utilities and other services. Lots of possibilities and very difficult to be hard-nosed with a family member.
 
OldShooter said:
Re niece, IMO it is a very bad idea to rent to family. What if she loses her job or just chooses not to pay her rent? Or she brings in a boyfriend or moves out to live with a boyfriend? Or she stops paying utilities and other services. Lots of possibilities and very difficult to be hard-nosed with a family member.
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I agree you really need to know your niece if you are going to rent to her. Plenty of issues in renting to people you DON'T know.

As far as taxes on "fair market rent" I don't know. If niece doesn't have utilities in her name or change her official address (mailing address). The house could just be "empty" for a while. If your niece lived with you, would you have to charge her rent? I'm not sure why you can't have "family" living in your house if you want to - but assuming the IRS is rational (or understanding) might be too much to expect. Maybe call a tax professional??
 
garyt said:
So I own a house my Dad was living in until he passed away last November. The house is sitting empty as I have no intention of becoming a landlord. We can't sell it yet because we're keeping our income low for ACA coverage for one more year until my wife turns 65.
I have a niece that would like to move in for a year to save for a house. We would not charge her rent. I am under the assumption that even if I allow her to live there for free I'd still have to show the going rate for rent in the area as income? I believe I read this 15 or so years ago when I bought the house for my parents. I put my Dad's name on the deed with mine so he'd be co owner. Is this true? I get why they'd do that because anyone could say they're not charging rent and avoid the taxes.
It still kind of stinks that you can't help a family member out with your own property if this is true.
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No, you are free to let another member of you family use a house you own if you wish to. You don't have to impute income. You might be thinking of monetary loans, where you are required to impute income. From Perplexity:
If you allow your niece to live in your second home rent-free, there are several tax implications to consider:
  1. The property will be treated as your second home for tax purposes, not as a rental property. This means you cannot deduct rental expenses or claim depreciation on the property.
  2. You can still deduct mortgage interest and property taxes as itemized deductions on your tax return.
  3. The fair market rental value of the property may be considered a gift to your niece. If the fair market rent exceeds the annual gift exclusion, you may need to file a gift tax return.
  4. You won't be eligible for any capital gains tax exclusion when selling the property, as it's not your primary residence.
  5. If your niece uses the property as her primary residence, it doesn't change the tax treatment for you as the owner.
It's important to note that while these are the general rules, tax laws can be complex. Consulting with a qualified tax professional for personalized advice based on your specific situation is recommended.
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It sounds like you have been treating the property as rental property and are considering imputing rent to your niece so you can continue to do so. I suspect the question you should ask is whether you can legally do so by gifting your niece the rental amount. People who own beach properties and overstay their limits may have more knowledge about when such practices go from gray to red. :)
 
Your situation seems like "Not rented for profit".
Page 24: https://www.irs.gov/pub/irs-pdf/p527.pdf#page=24

Either way, I would have your niece sign a lease with terms, rent amount, etc. documented, preferably annually. This way you will have legal protections and option of eviction if time comes. All utilities should be in your nieces name so you are not liable for unpaid bills. One of my motto in life is "expect the best but prepare for the worst". I am not implying that your niece has malicious intents but life can turn on a dime and the best intensions sometimes go down the drain. FWIW I have done similar paperwork even when lending low/no interest loans to family members. It's a deterrent and keeps their skin in the game.
 
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I'd just sell it, the heck with one year of ACA coverage, use that money for health insurance. But at my age I don't need or want to be a landlord and have to deal with all of that, it's time to simplify things in my humble opinion. If you want to really help your niece give her the down payment and be done with it, in many places it's a buyers market right now. But I'm a curmudgeon, I won't sign or co-sign for anything for anyone, I don't do loans, I only give to those I feel deserving, and sparingly.
 
We have two townhomes that we allow each of our sons to live in with their family. We don’t charge them rent. We do pay for sewer and property taxes because if they go unpaid, a lien can be put on the property. They will inherit the homes when we pass. Between DW and I, the gift tax exclusion for each year is more than what the market rent would be since $18k x 2(us) x 3(each family) = $108k/yr.
 
You can let the niece live in it for free and not report any income, also not take any depreciation nor expenses. Meaning she lives free and you are not a landlord so no income reporting.

To protect yourself from your loving niece, have her sign a contract (with witness or in front of notary) that she will leave the place with 60 days notice and if she refuses to leave pay $1,000 per day for each day she remains. Otherwise you never know she could get a boyfriend who convinces her to stay forever free...

If you have been pretending to be a landlord and deducting expenses and depreciation on your tax return, then just file an amendment to remove that stuff.
 
I think the imputed rent has to do with gift taxes not income taxes. The gift tax exclusion is $19k per person in 2025 so you and your wife can each "give" free rent equal to $19k so $38k for the year. So as long as fair market value is under $3k a month I don't see a problem.

I should add I know nothing about qualifying for ACA so perhaps some other rule there but nothing I have heard of.
 
OldShooter said:
Re niece, IMO it is a very bad idea to rent to family. What if she loses her job or just chooses not to pay her rent? Or she brings in a boyfriend or moves out to live with a boyfriend? Or she stops paying utilities and other services. Lots of possibilities and very difficult to be hard-nosed with a family member.
Click to expand...

This happened to my mother-in-law when she rented to her grandson. All three things happened--he stopped paying rent, had his girlfriend move in, quit paying utilities, and bonus(!), had a child with his girlfriend.

Caused a big rift in the family and the solution was to sell the house.

All families are different, but I would never rent to a family member nor would I become a landlord with one.
 
Thanks everyone for the enlightening responses
 
Is it vacant now and has insurance company found out? A vacant house is gonna demand a higher premium.
 
sengsational said:
I saw you said "We would not charge her rent."

It seemed to me some responses missed that.

You're fine. You have an asset that you're not making income with. No need to overthink it.
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I agree. Why make this more difficult than what it appears to be? Unless there is more that the OP should say about the situation it is just an asset that you are holding onto until you eventually sell.
 
I would add if you’re worried about ACA when DW goes on Medicare you then have similar issue with IRMAA. I never had to deal with ACA so I’m only familiar with the concept that it is more expensive as your income goes up. IRMAA is same :-(
 
^^^ But IRMAA limits are much higher. ACA at 400% FPL for 2 for 2025 is $81,760. IRMAA fir 2025 is $212,000. So many who have issues with ACA will not have IRMAA issues.
 
We absolutley avoid doing business with friends or with family members.
 
garyt said:
So I own a house my Dad was living in until he passed away last November. The house is sitting empty as I have no intention of becoming a landlord. We can't sell it yet because we're keeping our income low for ACA coverage for one more year until my wife turns 65.
I have a niece that would like to move in for a year to save for a house. We would not charge her rent. I am under the assumption that even if I allow her to live there for free I'd still have to show the going rate for rent in the area as income? I believe I read this 15 or so years ago when I bought the house for my parents. I put my Dad's name on the deed with mine so he'd be co owner. Is this true? I get why they'd do that because anyone could say they're not charging rent and avoid the taxes.
It still kind of stinks that you can't help a family member out with your own property if this is true.
Click to expand...
If it was me, I'd definitely have a rental agreement in place and actually make her pay fully refundable rent less any damages with a separate agreement that you would refund her everything within 10 days of her exiting the property upon receipt of a 60 day notice. Agreement should also state if she did not comply with these terms that would completely null and void the refund offer. That way she has some skin in the game and will actually save the money every month and also keep the property in good condition to get a full refund.

Here's a horror story from another member about letting a family member move into an empty house. Not sure how it all panned out.

Selling an inherited house with "houseguests"

I am named the executor of my dads trust to be split between me and my brother. Before our inheritance, I would have hit my FIRE goal early 2021. He has never had money before. As a matter of fact, when my dad would gift us money, he would buy my brother stuff that is "needed" like fixing up...
www.early-retirement.org www.early-retirement.org
 
RetiredAndLovingIt said:
If it was me, I'd definitely have a rental agreement in place and actually make her pay fully refundable rent less any damages with a separate agreement that you would refund her everything within 10 days of her exiting the property upon receipt of a 60 day notice. Agreement should also state if she did not comply with these terms that would completely null and void the refund offer. That way she has some skin in the game and will actually save the money every month and also keep the property in good condition to get a full refund.
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WADR, this is very naïve thinking (I was a landlord for 25 years.). She retains all kinds excuses for not paying and, since she's "family," she will be able to argue that the OP should not treat here like a tenant just because he has the right to do so under the rental agreement. It will not be fun, particularly if there is other family helping her to argue her case..
 
OldShooter said:
WADR, this is very naïve thinking (I was a landlord for 25 years.). She retains all kinds excuses for not paying and, since she's "family," she will be able to argue that the OP should not treat here like a tenant just because he has the right to do so under the rental agreement. It will not be fun, particularly if there is other family helping her to argue her case..
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You're probably right but if she really wants to save for her own place then this would be an incentive to do it. If she blows it OP will know quickly and can start the eviction process immediately. As to other family members, it's none of their business, he's at least giving her a chance that no one else is offering her.
I did something similar when my daughter moved into a house I bought. This kid spent every penny she got her hands on but she really wanted out of my house and I felt the same. It was back in the 2009 when house prices were at an all time low. I made the down payment, all she had to do was pay the low mortgage and utility bills. Once she was able to pay me back my down payment and get a bank to refinance, I'd quit claim the house over to her. I think it took her 5 years but she did it and learned a valuable lesson in the process.
 
Just to be clear (assumptions):
-You own this house so a sale would mean capital gains (magi) which would put you out of range for ACA credits.
-You plan to sell this house but are only delaying one year to qualify for ACA until medicare.
-Since you are not making any income from your niece so there's no need to include anything for income tax purposes.
-You are paying insurance, property taxes, cable/wifi, water/sewer, electric/gas and trash while your niece lives there. You didn't mention this so guessing.

I don't know your relationship with niece/brother or sister so only you can judge if a contract is required. I personally am in a similar situation with my daughter and nephew sharing my deceased parents' home for the last two years and haven't had major issues. But I will say there is a little bit of animosity because nephew is not very responsible (housekeeping) and I do all the maintenance even though my sister and her husband live 45 minutes away and I live on the opposite coast...hmmm. So there's that. You just never know how things will work out. Fortunately I don't mind the work and I enjoy spending six weeks or so at the house in San Diego twice a year.

Ok, a few things to consider.
1) Does your homeowner's insurance company know you're renting the house? Even if you're not collecting rent they may consider it a rental since someone else is living there.
2) Does the cost of ownership (insurance, prop tax, broken appliances, water heater, etc.) offset the ACA savings?

If the real reason you want to let your niece stay there is because you love her and want to do something nice for her then I see nothing wrong with that as long as you've consider everything. I'm certainly not one to judge. I actually hope it works out for you.
 
Guamaniac said:
Ok, a few things to consider.
1) Does your homeowner's insurance company know you're renting the house? Even if you're not collecting rent they may consider it a rental since someone else is living there.
Click to expand...
In my situation with our sons each living in a home we own, USAA issued a Fire Insurance policy including liability for the homes, not a regular homeowner policy. Each of the boys got a Renters Insurance policy themselves. The houses are covered under our umbrella policy.
 
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