Landlord or Homeowner Better for Taxes?

Question

Hope this makes sense, but was listening to episode 269 with Amanda Han and Brandon Hall, and it got me wondering.

Is there any real net- benefit from owning a relatives home and having them pay you rent versus them simply owning the home themselves?  Would there be any benefit to doing this that keeps less money going to the government overall?

Title and such isnt of real concern, as it would be kept in family.

Curious to hear if this makes any sense, or “Joe, youre dumb by taking income that isnt really income” type of comments.

Michael Plaks · Answer

@Joe Crupi

Playing with family dynamics by changing ownership etc is unsafe. You probably will assure me that "not in my family." Stilll

• What happens if your relative is not paying you rent, for whatever reason - lost his job, got flooded in a storm, had a medical emergency?  
• What happens if the house needs major work - who pays for it?
• What happens when there's a family feud down the road?
• etc.

If you dismiss all of these, then yes, there's a possibility of an overall tax reduction. If your relative pays you rent of $1,000, and your expenses plus depreciation exceed $1,000 - you may be able to generate a tax loss and reduce your taxes.

The trade-off is that you cannot sell the house tax-free, while your relative could.

Also, you will lose the legal protection of a homestead against creditors.

And your local property taxes will go up, having lost the homestead exemption, likely erasing any income tax benefits.

If you decide to proceed anyway, you have to play that game carefully:

• you need to formally acquire the house and pay a fair market price
• the rent has to be fair market rent, not some reduced nominal amount
• and a lot of other little details,

Bottom line: I would not recommend it, despite a small tax savings opportunity.

Lance Lvovsky · Answer

In the scenario you describe, you would be paying income tax on the rental income, assuming it is positive. Why would you want to do that?

You are also exposing you and the relatives to estate tax implications.

Joe Crupi · Answer

Pretty much what I was expecting to hear, just wanted to see if there was something maybe I was overlooking.  Appreciate the feedback guys.