Renting to family and friends: taxes, leases, and keeping the peace

Your sister needs a place. A friend from work is between homes. Your cousin has always liked the house. Renting to someone you know can be a great arrangement: you get a tenant you trust, and they get a landlord who will not vanish when the dishwasher breaks. It can also go badly in two specific ways, one with the IRS and one at the dinner table. This guide covers both.

This is general information, not tax or legal advice. The tax rules in particular have details that depend on your situation, so check with a tax professional before you set the rent.

The tax rule to know first: fair rental price

The IRS cares a lot about what you charge a relative. Under the rules in IRS Publication 527, if a family member rents your property for less than a fair rental price, the days they live there count as personal use days for you, as if you were living there yourself. The same goes for anyone else who pays less than a fair rental price. IRS Topic 415, Renting residential and vacation property, summarizes the same rule.

Why that matters: once a property has enough personal-use days, the IRS treats it as a residence rather than a rental, and the deductions you can take for it are limited. In practice, a below-market rental to a relative can mean you cannot deduct a loss on the property the way you could if you rented it to a stranger.

The flip side is the good news. Per Publication 527, if a family member rents the property as their main home and pays a fair rental price, those days are not personal-use days. A fair rental price is generally what an unrelated person would be willing to pay for a similar property.

An example (made-up numbers)

Say comparable homes nearby rent for about $1,800 a month, and you rent yours to your brother for $1,000 because he is family. That rent is well below a fair rental price, so his days there likely count as personal use. If your mortgage interest, taxes, insurance, and repairs add up to more than the rent, you may not get to deduct that loss. Charge something close to $1,800 and the property can be treated like any other rental. Your tax professional can tell you where the line sits for your numbers.

If you decide to give a relative a deep discount anyway, that is your call. Just make it knowing the tax tradeoff, not by accident.

Document the rent you chose

When you set the rent, save a few comparable listings from the same area with the date you found them. If anyone ever asks why you charged what you charged, you will have the answer.

Write a lease anyway

"We don't need a lease, it's family" is how most family rental arguments start. A written lease is not a sign of distrust. It is a record of what you both agreed to, so nobody has to rely on memory a year later. Cover the same ground as any lease:

• Rent, due date, and how it is paid.
• Late fee, if any, and when it applies (check your state's late fee rules).
• Who pays which utilities.
• Pets, guests, and who else can live there.
• How repairs are requested and who handles what.
• How much notice you give before entering.
• The lease term and how either side ends it.

Landlord-tenant law applies to relatives just like anyone else, including entry notice and the eviction process if it ever comes to that. Check your state's rules.

Invoices and receipts are your paper trail

When rent moves between family members by payment app, cash in an envelope, or "I'll cover the groceries this month," the record falls apart quickly. That matters for two reasons. You need records for your tax return, and you need them if there is ever a disagreement about what was paid.

The fix is to treat it like any other rental. Send an invoice each month for the rent at the agreed amount. Let your relative pay online by bank transfer or card, and send a receipt each time. If they pay in cash or by check, record it against the invoice. At year end, you have a complete ledger instead of a pile of texts. If two people share the place, like a couple or roommates, one invoice can list both of them and either can pay.

Take a security deposit

It feels awkward to ask a relative for a deposit. Ask anyway. It protects the property, it sets the expectation that this is a real tenancy, and it gives you a fair way to handle damage at move-out without a family argument about who owes what. States set limits on deposit amounts, how they are held, and deadlines for returning them, so check security deposit laws by state. Do a move-in walk-through together and take dated photos of every room.

When a relative pays late

This is the moment that tests the arrangement, so decide how you will handle it before it happens.

• Let the system send the reminder. An automatic reminder before the due date, and another after it, is far less personal than a text from you. Nobody has to be the bad guy.
• Apply the late fee the lease says, the same way every time. Waiving it once is generous. Waiving it every month means it is not really in the lease.
• Talk early. If a payment is late, have one direct, private conversation soon, not at a family event.
• Put any payment plan in writing. If you agree to spread a missed month over a few payments, send an invoice for each catch-up amount so both of you can see what is left.
• Know your limit. Decide in advance how many missed months you can carry. If the arrangement is not working, it is kinder to say so early.

Our guide on how to handle late rent covers the steps in more detail.

Keep the relationship intact

• Separate the roles. Keep rent and repair conversations in messages and maintenance requests, not over family dinner.
• Respect their home. Do not drop by unannounced because you have a key. Give the same notice you would give anyone.
• Fix things promptly. A relative is less likely to complain and more likely to resent a slow repair.
• Raise rent the normal way. With written notice and the timing your state requires. Our rent increase notice guide covers the rules.
• Talk about the end. Agree up front on how much notice either side gives before moving out or ending the lease.

How RentMerchant fits

RentMerchant gives a family rental the same structure as any other, so the paperwork does the uncomfortable parts. Add the property and your tenant (no unit setup needed), set the monthly rent and due date, and the invoice goes out every month with automatic reminders and receipts. Late fees can be applied automatically if your lease includes one. Your relative pays by bank transfer or card in their own portal, and anything paid in cash or by check gets recorded against the invoice.

You can send the lease for e-signature, track the security deposit, take maintenance requests, and log expenses for a Schedule E export at tax time. By default the tenant covers the processing fee; see the fees page for the exact amounts.

The Free plan covers up to three properties. Create a free landlord account and set up the arrangement properly from the first month.