The Big Move: My mother-in-law moved into our rental home years ago and made $60,000 in upgrades. We now want to sell. Should we repay her?

Dear MarketWatch,

My mother-in-law moved into our rental home eight years ago. From the start there was miscommunication about how much the rent was going to be. We thought she would pay the asking amount; she thought she would get a deal. She paid the asking price at the time.

Fast forward eight years, and two kids later. She is still paying the original amount we quoted her. She signed a month-to-month. We pay the rest of the mortgage — $500 a month — as well as anything maintenance-related (lawn, etc.) We want to sell the house because of the boom.

She also put in $60,000 into the house via upgrades — her picks, not ours. We covered the house payments while this was happening as well as put in our own money to fix up stuff. I specifically asked her to not do one of the upgrades, and she did it anyway. How do we break it to her that we want to sell, and do we pay her back the total amount she put in?


Never rent to family

Dear Family,

You said it yourself — it’s inevitably a tough situation when family and real-estate transactions mix. It throws the standard landlord-tenant relationship for a loop. After all, most landlords don’t have to worry about inviting their renters to Thanksgiving dinner and children’s birthday parties, for fear of having their latest dispute turn into that evening’s dinner-party conversation topic.

It seems that your spouse, you and your mother-in-law have managed to find some degree of compromise these past eight years. From the very start, your mother-in-law was willing to pay more than she expected in monthly rent. I’m going to imagine that proposing a rent increase was strictly verboten, since I’m at a bit of a loss why your mother-in-law didn’t eventually start paying more if she could manage $60,000 in upgrades to the home.

To answer, your first question: You need to let her know as soon as possible of your plans to sell. Not only is it a common courtesy that any person should extend to a family member — but it also might be the law. In many states, landlords are required to provide tenants who are on a month-to-month lease with at least 30 days’ notice prior to selling a home. In some places, like Seattle, 60 days’ notice is necessary.

Normally, a lease would carry over to the property’s next owner, and a tenant would have the legal right to remain in the home. That’s because leases are for the property, not the property’s owner. Month-to-month agreements can transfer, but obviously it’s a less long-term arrangement. That means your mother-in-law could very quickly be asked to vacate the home after it is sold.

You should give her ample time to get her affairs in order so she can find another place to live, if need be — to say nothing of the fact that inevitably you will need her approval to allow prospective buyers to tour the home if she hasn’t moved out already by that point.

Many states require landlords to give tenants at least 30 days’ notice prior to selling a rental property.

That all brings me to your next question: Whatever the circumstances that led her to making the upgrades she made, I do think you and your spouse should plan to pay back at least a portion if not the full amount she paid to improve the home. The changes she made may not be to your taste, but a new backsplash in the kitchen or a closet that’s been upgraded could appeal to potential buyers and improve the home’s selling price.

You’re in a position potentially to profit off those upgrades, and your mother-in-law is about to be thrust into a rental market where the cost of rent is rising rapidly and affordable homes are hard to come by. That $60,000 — or any portion thereof — would go a long way toward ensuring she can find a comfortable new home for herself. Plus, she may have chosen to pay for these upgrades under the assumption she would be in the home longer than she was. If she had known you were planning to sell, she might have saved that money for the future. I’d argue for all those reasons, reimbursing her is the morally right thing to do.

You may want to have her consult her account, too. Upgrades to rental properties are depreciable — and those tax benefits extend to tenants if they are the ones who paid for the improvements. Because the property will be sold before she could fully depreciate those assets, she might be able to deduct the balance.

With a normal tenant, I wouldn’t necessarily say you should extend such a courtesy — though I have heard of landlords who cut checks to previous tenants after selling rental properties as a goodwill gesture. A renter’s monthly payments don’t necessarily bankroll a freewheeling lifestyle for small-scale landlords, and instead often merely cover the costs of a mortgage and maintenance. All that is to say, many landlords wouldn’t survive without their tenants.

Keep in mind that there’s a difference between repairs and upgrades. If any of the costs she incurred came about because of typical wear and tear — let’s say she repainted a scuffed-up wall — then she should be expected to pay that herself. And if any repairs are needed to get the home into selling condition, you might want to discuss those costs with her.

I hope that your conversation with your mother-in-law goes smoothly. If it doesn’t, keep in mind how much stress an upheaval in housing can bring about. I’m sure that once she is settled somewhere comfortable, she’ll be able to recognize that you all had her best interest at heart throughout the process.

This post was originally published on Market Watch

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