Renting to parents?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesthere was a post on this last month and it turned bad... and most folks agreed with the poster that they were their rights to kick them to the curb.
Myself and Minh Le were aghast at those attitudes... your parents gave you life.. you owe them.. If you cannot afford to let them stay in the place for free.. you should not be doing this.. If they want to pay rent fine.. but just give them the money back each year as your 10k gift and write it off.
I know Minh and I were in the minority on this.. however thats how we see it.. we honor our parents don't treat them like tenants with signed lease market rent etc....
@Account Closed
21 Replies
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
there was a post on this last month and it turned bad... and most folks agreed with the poster that they were their rights to kick them to the curb.
Myself and Minh Le were aghast at those attitudes... your parents gave you life.. you owe them.. If you cannot afford to let them stay in the place for free.. you should not be doing this.. If they want to pay rent fine.. but just give them the money back each year as your 10k gift and write it off.
I know Minh and I were in the minority on this.. however thats how we see it.. we honor our parents don't treat them like tenants with signed lease market rent etc....
@Account Closed
- Homeowner · Grand Prairie, TX · Member since 2008 · 7 posts · 2 votes10y
Matt,
I have been renting to my parents for the last 10 years. I did not do it for the money and started before I had my own family started. I was able to do this at the time. Now I am just collecting rent to cover the mortgage and not making a profit. It has proven difficult at times but the family has helped out over the years when needed. We have 5 children in our family and we each put in money into a family fund. If needed we use this money for our parents. That is my situation but like I said things were different when I started I also had a back up plan and spoke with my family before I made my choice. I don't regret it one bit either. I am sure you will make the right decision. Take care
Hipolito
I bought my first townhouse roughly 7-8 years ago and was needing to get something bigger for my wife and kids. Without even asking my mom told me she would just rent my townhouse from me after i moved out and i agreed. The next day she already started bringing somethings over before I moved out. She started off paying $700/month with HOA being roughly $180 and taxes around 2k. The property was paid off so i was making like 3-4k a year. I ended up raising the rent to $800 about a year ago and she was fine with it and she has also done upgrades to the house without asking me for money. There are a few townhouses for rent $1600 and $1800 a month in the neighborhood so I feel I am giving her a good deal to live there. I have also rented to my in laws for the past 18 months and everything has been perfect. Given the right situation I think you should rent to your parents because you know they will be takin care of.
- Investor · Houston, TX · Member since 2014 · 208 posts · 135 votes10y
I believe every situation is different and what is right for one person/family could be wrong for another. Personally, I think mixing business and family can be very dangerous. That being said, if you don't NEED the rental income to live and would be ok if they fell on hard times and couldn't pay rent (because let's be honest, most people would not evict their parents), then go for it. Only you know the relationship you have with your parents as well as your personal financial situation. And as many opinions as you'll get on BP for and against, the bottom line is that you need to go with your gut on this one, as only you know the intricacies of your family dynamic. Just my two cents. :)
- Investor · San Jose, CA · Member since 2015 · 246 posts · 183 votes10y
Everybody's family dynamics are different. If my stepmother wanted to rent from me, I'd let her. It would never be an issue. My FIL lived with us and never paid a cent towards rent or utilities. If we rented a home to him, he wouldn't have paid. My friend experience similar issues with her MIL.
So I think it really depends on the situation. But I do believe that we have a moral obligation to take care of those who took care of us when they are no longer able to take care of themselves.
Two schools of thought.
1. A parent who cannot take care of themselves and/or cannot afford a place to live.
I trust people would find a way to provide for the parent in whole or in part. Whether it be providing a room in their own home or helping pay for a place to live. I don't think there is much more to discuss on this point. Do the right thing. I want to focus on the second school of thought.
2. A parent who has some income and/or lives in a home that's paid-off and wants/needs to move.
Some parents with the wherewithal to do for themselves don't want a free ride and would gladly rent from an adult child. Maybe it's the parent's way to indirectly leave a financial legacy for their child(ren).
Imagine a parent who has social security, pension, some savings, and is paying rent for an apartment or house. They're likely providing a profit for one of the BP community pros out there so why not do it for their own child?
Consider the parent who is living in a house that is paid-off, all that equity is tied-up, and their neighborhood is on the decline and they need/want out of there. Or their house has stairs and they need a single level. They could sell and move to a another place, but only if the numbers work. Maybe, they have an equity line they've been tapping and got into hole and the equity is too low. Lots of possibilities, so what kinds of things can they do?
Fannie Mae has a loan product called the Family Opportunity Mortgage for adult children who want to buy a second home for an elderly parent or even a child in college. It's treated as owner occupied, not investor, so rates are lower, fees are lower, and down payment is lower. The IRS allows landlords to rent to relatives at 20% below market rent and still get all the deductions. So, the parent could move into a new/newer home, maybe closer to child(ren), maybe nicer neighborhood, and all with the help of their child(ren). The parent may have enough income or proceeds from selling their home to cover most or all of market rent or child can give a 20% reduced rent. So, instead of a child or siblings giving a parent money to subsidize a home rented from a third party, the child(ren) could get the parent into a home and the child(ren) could benefit from amortized equity, depreciation, and may get some market appreciation over time.
Another consideration is Medicaid. If the parent owns a house and goes into a longterm care facility using Medicaid coverage, they'll lose their house. Medicaid will put a lien on the property and upon death, the Medicaid lien must be settled by the Estate which may exhaust all the equity. If they have a reverse mortgage and go into longterm care and cannot attest to living in the house, the lender can sell the house and leave the balance of the proceeds, if any, to the parent. Both scenarios hinder a parent the ability leave a financial legacy for their family.
As for signing a lease: I say absolutely. It gives the parent piece of mind that it is official. Moreover, a child can't legally back out of the deal. If the child gets divorced, the house could become a problem, but if the parent has a lease they will avoid the mess. Even if a disgruntled ex-spouse gets the house, the lease will give the parent some time to make adjustments if needed. In any number of adverse scenarios, the lease protects the parent as much as it does the child.
Everyone has their own opinions and I'm not here to argue either way. I just hope someone found this post beneficial.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes10y
@Matt F. To me renting to your parents as compared to other family members are completely different topics. For me I have a close relationship with my parents and I couldn't ever see making them sign a lease or paying fair market rent. I would let them pay me whatever they thought was fair.
Other family members I would absolutely make them sign a lease and treat them like any other tenant.
I am trying to picture my parents reaction if I made them sign a lease or sent them a late rent notice. Haha.
- Michael Noto you make my point about having parents sign lease in your post: " How to handle existing tenants w/o lease agreements when buying?" Suppose you precede your parent in death, suppose you lose the house in a divorce, suppose you're terrible at managing real estate and face a forclosure. All possible scenarios. Then A buyer walks in and finds your parents paying no or low rent and the buyer does exactly what you state in your other post. Protect your parents with a legal document for safe keeping if they ever need it.
thanks everyone for the feedback.
My main reason for wanting the lease and charging fair rent was for fear the IRS would disallow all deductions ,etc associated w/ that property citing it wasn't actually being run as a true rental. also a good point about should something happen to me, there is a lease in place. i wasn't aware of 20% reduced rent rule either for family members nor the Family Opportunity Mortgage so thank you @Tommy F. for that info!
Sorry to beat a dead horse, I just want to share some additional points.
IRS Publication 527 is not clear about below-market rents to related-parties, although it addresses renting Not-for-Profit in which case you can only deduct losses to the extent of rental income. There is a tax court memo (TC Memo 1983-411) that is more specific regarding 20% below market rents.
So, if you want to rent to your parents or other related-party, make it official with a lease, run it as a business, and account for all income and expenses in accordance with IRS rules. Then, depending on your adjusted gross income, you may be eligible to deduct the up to $25,000 in passive-activity losses against other income each tax year or carry-forward the losses until such time you're eligible to use them. If you're an IRS qualified Real Estate Professional, then you can deduct all the losses against other income.
Meanwhile, you can still "gift" $14,000 per year per person to another individual without tax consequences. So, a child could conceivably rent to a parent (activity 1), and then gift the parent $14,000 per year (activity 2). These two activities are separate events, so keep the two activities separate on paper to maintain a good audit trail should you ever get called into question.
Bottom-line, if you're inclined to have the parent pay nothing in rent (big picture), then just wash, rinse, and repeat the cycle of giving them $14,000 per year per person, and the parent may commingle the gift proceeds with other income and pay rent and other living expenses. Use a lease, so the parent doesn't wake up one day with you deceased, divorced, or bankrupt and get a knock on their door from an investor who just bought the house and isn't inclined to allow them to stay there paying low or no rent.
I'm not a CPA nor attorney, so do your own due diligence. Good luck!
- Richmond, VA · Member since 2017 · 3 posts · 0 votes9y
Originally posted by @Tommy F.:
Two schools of thought.
1. A parent who cannot take care of themselves and/or cannot afford a place to live.
I trust people would find a way to provide for the parent in whole or in part. Whether it be providing a room in their own home or helping pay for a place to live. I don't think there is much more to discuss on this point. Do the right thing. I want to focus on the second school of thought.
2. A parent who has some income and/or lives in a home that's paid-off and wants/needs to move.
Some parents with the wherewithal to do for themselves don't want a free ride and would gladly rent from an adult child. Maybe it's the parent's way to indirectly leave a financial legacy for their child(ren).
Imagine a parent who has social security, pension, some savings, and is paying rent for an apartment or house. They're likely providing a profit for one of the BP community pros out there so why not do it for their own child?
Consider the parent who is living in a house that is paid-off, all that equity is tied-up, and their neighborhood is on the decline and they need/want out of there. Or their house has stairs and they need a single level. They could sell and move to a another place, but only if the numbers work. Maybe, they have an equity line they've been tapping and got into hole and the equity is too low. Lots of possibilities, so what kinds of things can they do?
Fannie Mae has a loan product called the Family Opportunity Mortgage for adult children who want to buy a second home for an elderly parent or even a child in college. It's treated as owner occupied, not investor, so rates are lower, fees are lower, and down payment is lower. The IRS allows landlords to rent to relatives at 20% below market rent and still get all the deductions. So, the parent could move into a new/newer home, maybe closer to child(ren), maybe nicer neighborhood, and all with the help of their child(ren). The parent may have enough income or proceeds from selling their home to cover most or all of market rent or child can give a 20% reduced rent. So, instead of a child or siblings giving a parent money to subsidize a home rented from a third party, the child(ren) could get the parent into a home and the child(ren) could benefit from amortized equity, depreciation, and may get some market appreciation over time.
Another consideration is Medicaid. If the parent owns a house and goes into a longterm care facility using Medicaid coverage, they'll lose their house. Medicaid will put a lien on the property and upon death, the Medicaid lien must be settled by the Estate which may exhaust all the equity. If they have a reverse mortgage and go into longterm care and cannot attest to living in the house, the lender can sell the house and leave the balance of the proceeds, if any, to the parent. Both scenarios hinder a parent the ability leave a financial legacy for their family.
As for signing a lease: I say absolutely. It gives the parent piece of mind that it is official. Moreover, a child can't legally back out of the deal. If the child gets divorced, the house could become a problem, but if the parent has a lease they will avoid the mess. Even if a disgruntled ex-spouse gets the house, the lease will give the parent some time to make adjustments if needed. In any number of adverse scenarios, the lease protects the parent as much as it does the child.
Everyone has their own opinions and I'm not here to argue either way. I just hope someone found this post beneficial.
- Richmond, VA · Member since 2017 · 3 posts · 0 votes9y
I admire your wonderful article entitled "Two schools of thought" I am the parent in this situation. Please tell me if it can be done today in the state of Virginia? Is it still valid?
Regards. Jack
As far as I know, renting to parents does not have state specific restrictions and I have no reason to suspect Virginia is any different. The Family Opportunity Mortgage is a Fannie Mae loan product, it's 100% legitimate, simply ask your mortgage broker. A Family Opportunity Mortgage is primarily for (a) Parents seeking off-campus housing for their child in college, (b) Adults seeking to purchase property for their elderly parents, (c) Individuals seeking a residence for an immediate family member who is unable to do so on their own. It provides the opportunity to purchase an investment property at a lower interest rate than commonly available while providing a home for an immediate family member. Since you're the parent, obviously you'll need a child to work through the scenario described in this thread of posts. I'm not an attorney nor a CPA, so seek professional guidance. All the best!
- Rental Property Investor · Pawtucket, RI · Member since 2017 · 47 posts · 37 votes9yEvery case is different but I would rent to my parents and siblings because they very responsible.
- Rental Property Investor · Mount Airy, MD · Member since 2013 · 27 posts · 16 votes9y
My wife and I purchased her parents home and rented it back to them. We did this to help facilitate their retirement as we are able to rent it back to them at a discounted rent that works for their budget. So far it has been a win-win. They are able to stay in their existing home and enjoy some increased cash flow. It is not costing us much because the rent covers most of the interest on the mortgage. We cover the taxes and they take great care of the property. In the long run we figure that the property will appreciate and if it does we will get back some of the currently slightly negative cash flow from our end. And, if it does not, we don't care because we are happy that they are happy. We did go through all the formalities of having a lease etc. Best Regards, Marty
I am closing on a property next month that is 4br/2ba and I was talking to my sister about my plan. I am going to live in the master and rent out the other bedrooms to cover the mortgage. She jokingly threw out the idea that she should move in and my response was she could as long as she paid what I was expecting in rent. Her response to that was, "Wow...would you charge mom and dad rent?" My response was "1, I couldn't with a good conscience charge them rent after all they've done for us. 2, If I didn't charge them rent, I'd be putting myself in a very tough financial position which would be very stupid and irresponsible. So to answer your question, I wouldn't move them in period."
Now if I had a large RE portfolio where I could put my parents in a home for a very small cost, sure, I'd absolutely do it. Where I am now though, I can't.
I draw the line at making a profit off of my parents or having to treat them as "tenants".
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes9yIt's nice to know there are charity landlords that aren't running a business. It makes my rentals look credible.
- Real Estate Investor · Louisville, KY · Member since 2017 · 56 posts · 39 votes8y
I am looking at purchasing a house for my father to live in, and found this thread.
You seem to be very knowledgeable about the tax implications, and the Family Oppt mortgage. I read that a person cannot qualify for this loan as the purchaser(child) if they have other investment properties. Are you aware of this restriction?
This statement is very interesting,
" Then, depending on your adjusted gross income, you may be eligible to deduct the up to $25,000 in passive-activity losses against other income each tax year or carry-forward the losses until such time you're eligible to use them. "
@Micah Mcarthur I don't have the Fannie Mae details in front of me, so I'm not doubting what you read. To qualify, you may have to provide a letter of explanation defining the intent to purchase a home for elderly parents who are financially limited. There is also a borrower disclosure required that states something along the lines that an immediate family member will occupy the home and that the property is not intended to be a rental. I suppose you could split hairs with the last comment about "not intended to be a rental". I believe the context is that the buyer doesn't intend to get the loan with favorable terms and use it specifically as an investment (rental) property. The overriding purpose is to have an immediate family member occupy the home. Also, to qualify for the purchase, the family member may offer monetary gifts to the buyer to help get the loan. It's all about the intent. Whether you call it gifting or renting the end result is the same, but they are technically mutually exclusive events. In my original post (I didn't go back to read it), I believe I was saying that the technicality of "renting" to the parent and using a lease was to (1) legally protect them (and you), and to make it official should you die, get divorced, or go bankrupt, and (2) make it official for reporting on Form 1040 Schedule E and using the tax benefits. Regarding their protection, there are numerous BP posts about investors inheriting tenants who pay below market rent and they tenant must either agree to pay higher rents to the new owner or when the lease expires they're asked to leave. A long term lease protects your parents from the immediate shock of that possibility and gives them time to make other arrangements if needed.
Regarding the tax consequences, I believe I cited a tax court ruling about renting below market to relatives that results in a passive loss. And, yes, there is the special $25,000 allowance. See the Instructions on Form 8582 for information about how to report any income or loss from the activity. The $25,000 deduction gets phased-out as your Adjusted Gross Income reaches/exceeds $125k. https://www.irs.gov/publications/p925#en_US_2017_publink1000104571
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