My wife and I are buying our first investment property. Our son will be living there to attend medical school over the next four years. It's a four bedrooms house, and he has already found three roommates each of who will pay $500 rent. Should our son also pay rent? Most rentals in the area go for $1500- $2500 so with or without his rent, we think it would fall into a "fair market value". However, from the IRS pub. 527, under personal use, example 3 says that if he pays rent than its not considered personal use implying that if he doesn't then it would be. We don't want to do the messy calculation of cutting his portion out of deductions and depreciation, but we also prefer not to have to claim as income money he would pay as rent (especially because we would likely be providing that money). Can someone give us advice. Thanks.
Treat him as any other tenant and charge rent with lease, deposit, etc. Essentially make it an arm length transaction. Not only will this minimize tax problems but it will allow your son to use you as a rental reference after his schooling is complete and he enters his internship. Preferably you and your wife have the property held by an LLC, so as to minimize questions of the relationship from future landlords.
Now if you and wife wish to help him with the rent etc just gift that amount to him as a separate deal.
I've seen this done a number of times with parents letting their kids rent out their old house with roommates. I've also had -- and have-- roommates myself.
What about utilities? Utilities for 4 people if you say "utilities paid" WILL be expensive. I've been there and done that with roommates. They'll want it 70 inside in the middle of a summer drought. They'll crank the heater up to 75 in the winter. Making them split utilities or including a "utilities included up to $..." might be a good way to combat that.
Who will take care of the lawn? (More like, who will pay for lawn mowing?)
Zoning? Does your city limit the number of unrelated occupants in a house?
Vacancy? If there's a vacancy, will his remaining roommates split the difference or will he pay?
Will your standard homeowner's insurance cover you here?
Will your property taxes in your area go up if it's considered a rental?
If he "rents" from you and you report the income, could you claim depreciation on taxes on house wear and tear or expenses (repairs, etc.)? My accountant told me I can't count depreciation since I live here (with roommates). Not sure if that's accurate or if the son changes things, but if he's your (tax) dependent and lives there, I wouldn't guess that you could detract depreciation or rental income loss from taxes. Maybe I'm wrong.
Instead of paying you rent, what if he paid the utilities, repairs, etc.?
Not legal advice or recommendations, I'm only mentioning things you should think about here.
So you'll be giving him money then he'll be paying it back in rent? Why even bother, charge the other 3 rent, make them all split utilities and move on. No reason to overcomplicate things. This should be a fairly easy thing to do. Make him get a job and work some to pay for his share of utilities and let him live there rent free.
Brian Mathews, Brian's Heating and Cooling
E-Mail: [email protected]
So I'm between Edward's and Brian's solution. I prefer Brian's but am concerned that the IRS would consider him living there for free as personal use. Are there any tax attorney's out there that can address that concern?
You can call the IRS and pose them the question. If the answer is you can't take full depreciation just do not identify yourself with your SSN. If they state you can fully depreciate the property ask for their statement in writing and keep on file. That way if a question arises later you are covered.
Real Estate Investor from Lake Villa, Illinois
You are getting conflicting and incorrect information from some posts here. I will clarify for you.
If your son is under 24 and full time student but does not provide over half of his own support her will be your dependent.
If he is over 24 and made under $3,900.
What you want to do is not have him pay rent. You will only include on Schedule E 75% of ALL expenses. You could include the other 25% of taxes and interest on your schedule E. You will depreciation 75% of the property.
It is in no way a messy calculation. It is a pretty clean calculation as you will keep track of all the expenses anyways. Him living there free of charge is of no consequence it is not different than if you had roommates. You are essentially treating 25% as an extension of your own residence.
@Jon K., Fire your accountant. You've been missing out on depreciation that you are required to take.
I'm an Enrolled Agent licensed by the Department of the Treasury.
I represent taxpayers before the IRS. I have the references to back it up if you don't understand anything here.
Real Estate Investor from Lake Villa, Illinois
I really appreciate the advice, and you're right that the calculation may not be that messy, This solution makes perfect sense.