Renting home to parent at low cost

8 Replies

Hi All,

I recently purchase an investment property, but i rent it to my parent at lower price, not at a market rent value. My question is:

  1. Can i file my tax under a rental property, the reason is that i want to deduct the $ i spend on fixing the property.
  2. I was told by a friend that i can't because if i do, then my mom has to file a tax return because she is getting income by not paying full rent price. (She's on disability at the moment, her income is not taxable)
  3. I already file this year tax and file this property as a personal property.
  4. Which way is a better way to file the tax, as a rental property or as personal property. i know that i get tax break on the loan interest if i file under personal property. Has anyone ever face with this issue before?.

thanks in advance

I am not an tax advisor accountant but I do think your friend is wrong. If you decide that the rent is $200. per month - the rent is $200. per month. There is no law against being a poor business manager. The difference between what a good business manager would have produced and what you as a poor business manager produced is not someone else's income.

BTW: As a business adventure you also get to deduct the interest on the mortgage, don't you?

stephen

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Is your friend a CPA? I'm not, but I'm with Stephen and I think your friend is quite confused.

  • Can i file my tax under a rental property, the reason is that i want to deduct the $ i spend on fixing the property.

Any home that is not your primary residence that you are leasing to someone else, regardless of relationship, is considered rental property and should be reported on your taxes as such. You can then get deductions for expenses, mortgage interest, property taxes, depreciation, etc. You also have to report the income you collect from your mom as well.

  • I was told by a friend that i can't because if i do, then my mom has to file a tax return because she is getting income by not paying full rent price. (She's on disability at the moment, her income is not taxable)

Your tax return and your mother's tax return have nothing to do with each other. As far as I know, getting a break on rent is not considered income for taxing purposes, even if you're on disability.

  • I already file this year tax and file this property as a personal property.

I assume you mean you already filed last year's taxes. I would amend that return, as I'm sure you left money on the table by not claiming all your legal deductions.

  • Which way is a better way to file the tax, as a rental property or as personal property. i know that i get tax break on the loan interest if i file under personal property. Has anyone ever face with this issue before?.

Rental property, as stated above. Mortgage interest is tax deductible at this time on primary or non-owner occupied property.

Be careful who you take advice from. I'd go consult with a CPA to make sure you understand everything correctly and get your questions answered.

You need to see an accountant.

The income is rental property income. You need to take all the deductions and appreciation along with that.

Money spent fixing up a rental before its ready to rent is not deductible at all. Instead, it increases your basis.

Thanks all,

My friend is a not a CPA, he works in the IRS. I also talked to the tax preparer, not a CPA. They both said the same thing. I think I'm going to take it to the CPA for this.

My monthly mortgage is around $750 and my mom paid $665 per month. My questions is that would i get $665 as income every month. Wouldn't that increase my income which in turn increase my taxable income?...

In this sort of thing phrasing is everything.

You are saying: I am subsidizing my mother. The IRS perspective on that is: you do not have a business venture and your mother is receiving taxable benefits.

What you should be saying is: I have a rental property on which I am losing $85. per month gross plus my other deduction-losses. Boy am I stupid for making this business deal.

Talk to the CPA.

stephen
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Originally posted by @Vannak Kann :
Thanks all,

My friend is a not a CPA, he works in the IRS. I also talked to the tax preparer, not a CPA. They both said the same thing. I think I'm going to take it to the CPA for this.

My monthly mortgage is around $750 and my mom paid $665 per month. My questions is that would i get $665 as income every month. Wouldn't that increase my income which in turn increase my taxable income?...

"he works in the IRS" - OK, that's scary lol!

Yes, your rental income will increase your overall income, but then your deductions will reduce it, particularly the depreciation (a good CPA will explain all this to you). As to what @Jon Holdman stated, when you said "fixing" in your original post, did you mean general repairs, or rehab?

Let us know what the CPA says. I'm honestly curious :)

Thanks all,

I will let you all know after i talk to a CPA.

Here's some guidance on less than market value rent.

http://www.irs.gov/taxtopics/tc415.html

Specifically... "A day of personal use of a dwelling unit is any day that it is used by:

  • You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home under a shared equity financing agreement
  • A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price
  • Anyone under an agreement that lets you use some other dwelling unit
  • Anyone at less than fair rental price"

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