Renting Your Property to a Family Member: Should You Do It?
Do you have a vacancy at one of your rental properties? Have you ever considered renting to a family member? Renting to a family member can be a way to gain a stable tenant, but before you go ahead and do it, there are some important things to be aware of.
Claiming the Income on Your Personal Tax Return
When renting out part of your home to a family member, it can be tempting not to claim the income on your tax return. However, that would be incorrect. If you’re renting out one of your properties to a family member, you’re technically supposed to claim the rental income on your tax return.
Failure to claim the rental income on your tax return can not only mean possibly getting in trouble with the Canada Revenue Agency; if you were hoping to use the rental income for mortgage qualification purposes, you might not be able to because lenders often want to see copies of your most recent personal tax returns. If the rental income is missing, you likely won’t be able to include it as extra income on your mortgage application when buying a new property.
With the mortgage stress test, every dollar of mortgage qualification often counts. Losing the ability to claim rental income can mean the difference between qualifying and not qualifying.
Using Rental Income to Qualify
Because you’re renting to a family member, some lenders may not allow you to count the rental income. The reason for this is simple. You’re less likely to evict a family member who’s not paying the rental than a tenant who isn’t.
Lenders are also concerned that you’ll help family members pay the rent. They are also worried that you’ll be renting out the property for a lot less than it’s worth. Even if the lender allows the inclusion of rental income from a family member, the lender may request that you order a market rent report from an appraiser to confirm that the rent the family member is paying is reasonable. A market rent report is a lot more inexpensive than an appraisal. It might only be $150. It makes sure you’re not artificially inflating the rent.
If you’re looking for lenders who have no problem allowing rental income from family, you might consider working with an alternative lender. Alternative lenders are a lot more flexible. They allow rent from family members, but they may also allow rent from roommates as well.
The Bottom Line
Are you looking for a lender with flexible rental policies for family members? Speak with our mortgage experts to find the right mortgage lender.