***We don't want to be home owners anymore ***

10 Replies

Hello everyone. I wanted to lean on some of you that have experience. My in laws live in Greenwood SC said they do not want to own any more the would rather rent from us so we can benefit from the tax advantages. They are leaving their home with potentially 50k in equity to my family and I. Because they do not own the home out right they cannot gift it to me. I have come up with 3 options:

1- buy the property and have the negative cash flow of $100-200 per month then wait until the in-laws move out so we can almost double our rent and have a positive cash flow of $90+ every month?

2- get the mortgage statement sent to my primary home and pay it. Then collect rent from in laws?

Or

3. Or don't buy?

Thank you for your time and advice.

3.

Hi @Walter Duffy , this is an interesting scenario for sure. 

My gut tells me that you’ll not be getting any tax advantage on it until you own it.  Clarify this with an accountant for sure because I’d hate for your parent’s wishes to be missed simply because of a misunderstanding there.

As far as negative cashflow vs positive . . . Your folks don’t seem keen on harvesting the equity but rather they seem motivated toward setting you up here.  Is there no way to have it be a break even monthly with you purchasing it?

Why do they not want to own besides gifting you equity?  do they have repairs coming up they can't afford? are they tired of home maintenance?   You have to run numbers and make sure that this is not a financial drain on your family.  If the rent they are willing to pay does not cover expenses, maintenance, repairs, etc then I would encourage them to sell and gift the equity to their children if they wish. It is not just paying the mortgage.   If the numbers are okay the cleanest way to do this is to buy it with them gifting you some equity. (check tax regulations on gifting).   It could be a win-win or a loss. 

@Walter Duffy unfortunately the IRS has very specific rules about renting to relatives at fair market value. You can't charge them half of market value to manufacture a tax loss, because that is considered tax fraud. You need to charge them fair market, which is the going market rate for similar properties or the same price you would charge someone you are not related to.

As far as the mortgage, you can just start making payments on it. Write up a contract and have them transfer deed to you. Under the agreement, you pay them a lump sum and take over their loan. It stays in their name, but you pay the loan and you get the interest statements sent to you. As long as you take title of the property and have proof you are paying the mortgage, you can legitimately claim the expense. Make sure you pay them something for the property, so the sale involves transfer of funds, which helps to legitimize the transaction.

Just be very careful here, because charging under market rent and buying the property for under market value will appear as tax fraud during an audit. Google renting to relatives under fair market rent IRS and read up on it.

Originally posted by @Walter Duffy :

@Will Fraser the only way to have positive is to double their rent or put more down.

Have you spoken with a lender about the ability to use the equity they have as a gift toward the down payment in your purchase?  That could be a strong move.

 

Okay so number 1, I would refer you back to my guidance over the last few weeks, and then second, what's amazing is your in-laws are right, right now, with a little bit of caviar. You want to list the house on the market right now and sell it, pull all the cash out of it and don't go back into a rental property. Take that money and use it in flips or into lending money. My buyers pay 12 percent and 3.75 points. Which is a greater rate of return then you can make with a rental. With a rental you can’t make as much money as you can vai a 12 percent and 3.75 points. So it's better to lend your money because if you chose to do a rental, obviously you are renting to your in-laws, but if you’re normally renting to someone in the outside world, they're not gonna get the same rate as you will by lending. So it's better to lend your money and make 12 percent and 3.75 points because your return will be greater, and then you're lending your money to a person who's flipping properties or improving them. So they're buying them and fixing them up, and they're selling them and you're making your rate of return on lending. If you lend your money to a renter, your asset is depreciating as the market is in a fall position, or it’s depreciating by virtue of them not maintaining it, so you're gonna lose value. So I would tell you to go to a lending scenario instead of the rental one. Follow my guidance because right now is not the time to buy-and-hold a house.