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Tax implications on renting Duplex to sibling who is also co-owner
Hello!
I can't seem to get a straight answer online by searching for this. My situation is:
1. W2 income puts me in 35% tax bracket.
2. Purchased a duplex with sibling as co-owner that will occupy one half of duplex.
3. Other half is rented out.
4. My sibling's W2 income is 12% tax bracket.
5. Sibling will pay less than half of market rate for rental
6. Interest is ~34k, rent is ~1.8k for half rented, sibling will pay 800
I'd like to deduct the full property interest from my income, but I'm unclear on the best way to structure this. I see 3 options, but maybe there's more?:
Option 1:
- Claim half interest, depreciation, property taxes, insurance, etc., claim rental income
- Sibling claims half interest as primary residence.
Option 2:
- Claim full interest, claim rental income from tenants and sibling
Option 3:
- Claim full interest, claim rental income from tenants and charge sibling close to full rental (1.6k)
| Option 1 | Option 2 | Option 3 (full) | |
| Rental Income | 21600 | 31200 | 40800 |
| Depreciation | -4550 | -9100 | -9100 |
| Interest | -16800 | -33600 | -33600 |
| Taxes | -3000 | -6000 | -6000 |
| Insurance | -500 | -1000 | -1000 |
| Garbage | -300 | -600 | -600 |
| Total | -3550 | -19100 | -9500 |
Option 2 is the best, but because it's so far below market rate, I'm not sure if it that would cause problems. I can easily gift my sister the difference tax free, but then I'd have to pay taxes on the income still.
Also, can I deduct the full property tax and depreciation or only half with option 1? I'm assuming I can only do half for everything.