A bona fide lease is a rental agreement that reflects a real, market-based deal rather than a paper arrangement designed to work around a lender, a housing program, or the tax code. Federal law applies a three-part test: the tenant is not the property owner or a close family member of the owner, the lease was negotiated at arm’s length, and the rent is not substantially below fair market value for the area. Whether a lease clears that bar controls whether a tenant keeps possession after a foreclosure, whether a landlord can accept a Section 8 voucher, and whether the IRS will let a landlord deduct rental expenses.
The Three Requirements
The Protecting Tenants at Foreclosure Act sets out the definition that housing law, tax law, and subsidy programs all lean on. A lease qualifies only if every one of these is true:
- The tenant is not the mortgagor, and is not the child, spouse, or parent of the mortgagor.
- The lease is the product of an arm’s-length negotiation between parties acting in their own self-interest.
- The rent is not substantially less than fair market rent for the property, unless the rent is reduced through a federal, state, or local subsidy.1Federal Reserve. Protecting Tenants at Foreclosure
Each program applies these elements with its own consequences, but the underlying question is always the same one: would this deal make sense between strangers?
What Arm’s Length Really Means
An arm’s-length transaction is one where each side negotiates for its own benefit and neither has leverage over the other through family, shared finances, or a side deal. A landlord who rents to a stranger found through a listing meets this test almost automatically. A landlord who rents to a sibling at a steep discount on a handshake does not.
Courts look past the lease document to the surrounding facts. A rent figure that matches the market, a lease signed well before any financial trouble on the property, and a record of regular payments all point to a legitimate deal. A lease that appears right after a foreclosure filing, with unusually low rent and a tenant who happens to be the owner’s relative, points the other way.
Fair Market Rent and the Subsidy Exception
The rent does not have to match market rates exactly, but it cannot be substantially below what comparable units in the area command. The benchmark most agencies use is HUD’s annually published Fair Market Rent for the metro area or county, which anyone can look up on HUD’s website.2U.S. Department of Housing and Urban Development. Fair Market Rents
There is one important carve-out. If the rent is below market because a federal, state, or local subsidy covers part of it, the lease still qualifies. A tenant paying a reduced amount through a Housing Choice Voucher isn’t paying an artificially low rent — the government covers the balance — and the PTFA expressly protects subsidized tenancies from being disqualified on that ground.1Federal Reserve. Protecting Tenants at Foreclosure
Why It Matters in Foreclosure
Foreclosure is where the definition carries the most weight for tenants. Without bona fide status, a new owner can move to evict almost immediately. With it, the PTFA — made permanent by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 — forces any successor in interest to respect the existing tenancy.3Office of the Comptroller of the Currency. OCC Bulletin 2020-9
Fixed-Term Leases
If the lease has a set end date, the new owner has to honor it through its remaining term. The tenant keeps paying rent, and the buyer steps into the old landlord’s position. A change of ownership alone is not grounds for eviction.4Office of the Comptroller of the Currency. Protecting Tenants at Foreclosure Act
Month-to-Month Tenancies
Month-to-month tenants and those with tenancies terminable at will under state law get less. The PTFA guarantees at least 90 days’ notice before eviction, but does not force the new owner to let the tenancy continue beyond that. If state law requires a longer notice period, state law wins.5FDIC. Protecting Tenants at Foreclosure Act of 2009 A written, fixed-term lease is far stronger footing than an informal month-to-month arrangement.
When the New Owner Plans to Move In
A fixed-term bona fide lease can be cut short in one situation: the property is sold after foreclosure to a buyer who will use it as a primary residence. Even then, the tenant is entitled to a full 90-day notice to vacate.4Office of the Comptroller of the Currency. Protecting Tenants at Foreclosure Act An investor buying the home as a rental cannot invoke this exception.
Section 8 Rules Go Further
The Housing Choice Voucher Program applies a stricter version of the same idea. The program requires a written lease that identifies both parties, the unit address, the lease term, the monthly rent, and which side pays for which utilities.6eCFR. 24 CFR 982.308 – Lease and Tenancy
The family-relationship bar reaches further than the PTFA’s. A public housing authority has to deny approval if the owner is the parent, child, grandparent, grandchild, sister, or brother of any household member. The only exception is when renting from a relative would serve as a reasonable accommodation for a household member with a disability.7eCFR. 24 CFR 982.306 – PHA Disapproval of Owner The concern is straightforward: relative-to-relative rentals invite inflated rent and circular payments that the program cannot easily police.
Tax Consequences of a Non-Bona-Fide Lease
The IRS does not use the phrase “bona fide lease,” but it enforces the same idea through its personal-use and fair-rental-price rules. Renting to a family member, or to anyone else, at below fair market value causes the IRS to treat those rental days as personal-use days rather than business days.8Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
That reclassification changes what a landlord can deduct. Under Section 280A, once personal-use days exceed the greater of 14 days or 10 percent of the days rented at fair value, the property is treated as a personal residence. Deductions for expenses like depreciation, repairs, and insurance are capped at the rental income actually received, which eliminates any tax loss from the property.9Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. Landlords who give a relative a break on rent often discover the cost of that discount when their deductions get disallowed.
Red Flags That Sink a Lease
Agencies and courts look past the document to the real relationship between the parties. A lease can be fully drafted and still fail the test if the facts around it point to a sham. Common warning signs:
- Family or financial ties between landlord and tenant. Under the PTFA, a lease automatically fails when the tenant is the mortgagor or the mortgagor’s parent, spouse, or child, and other relationships raise suspicion when combined with other factors.1Federal Reserve. Protecting Tenants at Foreclosure
- Rent well below market. A modest discount is not automatically fatal, but rent at half of what comparable units command, with no subsidy to explain the gap, does not look like an arm’s-length deal.
- Circular payments. If the landlord returns the rent through a loan, gift, or other pass-through, no real consideration changed hands. That pattern is the clearest evidence of a sham.
- No payment records. Regular payments by check or bank transfer create a paper trail. Cash-only rent with no receipts makes it hard to show the lease was real.
- Suspicious timing. A lease signed shortly before or after a foreclosure notice, particularly one that appears backdated, invites scrutiny. Legitimate leases usually predate financial distress on the property.
One factor alone rarely decides the question. Combinations do. Below-market rent between strangers may survive. Below-market rent between siblings with no bank records almost certainly will not.
How to Show Your Lease Is Bona Fide
A tenant facing foreclosure or another challenge starts from a favorable position: the burden generally falls on the party attacking the lease. In foreclosure cases, an existing tenant is presumed bona fide unless the new owner proves otherwise, and a buyer who skips the required 90-day notice cannot force a tenant to produce proof of the tenancy on a few days’ demand.
Presumptions are still a weak place to stand. The tenants who keep their homes are the ones who can put documents on the table:
- A signed, written lease with the property address, both parties’ names, the term, the rent, and utility responsibilities.
- Bank records of rent payments. Canceled checks or electronic transfer confirmations showing regular monthly payments are far more persuasive than handwritten receipts.
- Utility accounts in the tenant’s name at the rental address, which corroborate actual occupancy.
- Communications with the landlord — emails, texts, or letters about maintenance, renewals, or routine issues — that reinforce an ongoing, real relationship.
The through-line across every context is the same. A bona fide lease is one that would make commercial sense if the parties had never met. Rent that matches the local market and money that actually moved on schedule will carry the lease through most challenges.10HUD Exchange. What Is a Bona Fide Tenant Under NSP?