If you buy your parents’ home and rent it back to them…
…you can create a nice tax break.
Your tax planning will definitely benefit from doing this!
A simple transaction can be a win-win for both you and your parents or in-laws.
Assuming your parent’s home is paid off or the interest deduction added to other itemized deductions is less than the standard deduction, a tax savings can be created.
This will also put needed cash into the hands of your parents or in-laws without them having to refinance or dip into a home equity loan.
You must pay fair market value for the home when purchased, however courts have allowed landlords to charge up to 20% below fair market rent to relatives (L.A. Bindseil, TC Memo 1983-411).
Any losses generated by the rental property will fall under the passive activity rules, which will need to be reviewed prior to making the transaction.
Besides writing off expense that would not normally be a deduction (i.e. operating expenses for the property), once your parents or in-laws are no longer living in the home you will have options;
- Sell it
- Rent it to another tenant
- Move in.
Moving in can create a bonus benefit; if you make the home your principle residence for 2 or more years you will be able to shelter another $250,000 or $500,000 worth of capital gains income though the IRC Section 121 deduction.
If you have any questions, comments, or concerns about tax planning, or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.
– Mark
This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.
LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.
