Tax benefit for primary residence in SC

4 Replies

Hi BP folks,

I am planning to transfer part of the ownership of a rental property in SC under my parent's name, so that they could live there and be able to claim it as their primary residence. My question is, if the property becomes a primary residence for my parent, does it still count as a rental property on my end since I still have a larger portion of ownership in it? Am I still able to deduct any expenses in the property?

If your parents are paying you fair market rental rate for staying in your portion of the property, then it is rental property and treated as such.  If your parents are not paying you fair market value for rent, then your property is deemed 'personal use' and is not a rental property. If it is personal use and your second home you should be able to take schedule A itemized deductions for things like mortgage interest and real estate taxes. 

@Johnny Szeto , If you transfer ownership to parents, let's say 49%, you can only deduct 51% of mortgage interest and taxes. Also 51% of the expenses for rental purpose.  Not the full amount.

The other 49% of mortgage interest and taxes are deducted by your parents as an itemized deduction. The 49% of the rental expense (That would have been deductible by you if you had not transferred the ownership) is not deductible by your parents because they are not renting out the house.  

If your parents treat the house as the Main home and have 49% ownership, they will get section 121 exclusion (Exclusion of gain from sale of principal residence) for 49% of the gain if the house is ever sold and if they meet the criteria.   

On your end, you will not get the exclusion because you might not meet the use test ( 2 out last five years as main home)  of section 121 when the house is sold depending when it is sold and how it was used before ( your main home) 

 

Thanks @Ashish Acharya for the analysis, so say if I still have 51% ownership of the house, can I utilize 1031 exchange to trade up for a larger property in this case?

@Johnny Szeto , You can only take advantage on property that is held for investment.  Owning a fractional interest greater or less than 50% is not the issue.  The issue as @Paul Allen said is "are you treating it as investment and can you demonstrate that.  In that event you can do a 1031.  

If you simply retain a % ownership of the property and let your parents live in the entirety  you're really not accomplishing much.  They won't get the full 121 exemption as @Ashish Acharya said.  You won't get full tax benefit on interest deduction.  You get no depreciation write off and no expense against income write off.  And no 1031.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.