I tried finding this scenario on the forum and couldn't find something similar. I am buying a rental property for my 22 year old daughter to start out after college. It is a 3 BR townhouse in a vacation area. She will have 2 roommates, 1 right away and one in September. There is a good possibility of a 2 month summer renter to fill in. I am discounting her third of the rent by $240 a month to get her on her feet. I am planning to keep it at least 10 years (possible summer weekly rental at some point). I have 2 questions:
1. Since she is family getting a one half discount, would it be better to have a third of it as a second home and write off a third of the mortgage and taxes. Then have the other 2 as income producing renters? I see the advantage as being similar cash flow and income with less depreciation write-off (more $ when I sell).
2. Is it okay to do 2 leases for the roommates? One lease agreement will be tough with different start dates and 1 being my daughter with no lease. I read it's always better to do 1 lease.
Do not discount your daughter's rent. Keep it the same as all of the parties. If you want to help her out, give her money as a gift that she can use to pay her share of the rent. Treat your daughter and the other two tenants the same, using the same rental agreement and terms. Treat it as a business.
There are sound reasons for doing so...
1. Tax reasons. Income and expenses must be properly tracked. If you are renting one unit to family at a discounted rate, you may still be held accountable to pay taxes on the fair market value of the unit.
2. Resell reasons. Future purchasers will want to know what income the unit generated, not what potential income it could have generated.
3. Education reasons. Your daughter will learn how to be a tenant and she will be able to establish a rental history that could serve her well. Showing favoritism to her may negatively affect the relationship she has with her roommates.
Thanks Marcia. Good points.
I agree with everything @Marcia Maynard said - there is not much else to say.
So, on the flip side, let me add that some parents pay their children to manage the rental they live in.
The management fee happens to be the same amount as the school's tuition. Imagine that - a tax deduction the size of the tuition expense.
My parents charged me "rent" from the time I graduated HS to the time I moved out. I did not appreciate it at the time. However, looking back, I realized that it helped me learn to budget so that when I did move into my own place, I did not have to worry about putting money aside for rent. My rent was always the first bill that I paid. Would I do that to my kids??? If I had any, probably not. But I would do something that would help prepare them for their financial future.
But, enough about me......
My point is, giving your daughter a discount on the rent may be doing her a disservice. Would she really learn to budget for realistic expenses if she is paying unrealistic rent? Or if she knew that you were there to help bail her out? Hold her accountable for the full rent. If you want to put $240 aside for her "future" (in secret), well I am sure that she would appreciate that money when she, one day, gets married. But treat her like the adult she is.
You don't have to charge her a late fee and I am sure that you would never evict her. If she needs help, birthdays and Holidays are always a great time of year to get a cash gift. LOL!
Let me know what you decide. Good luck.
Some clarification of tax implications:
From the L.A. Times: "If you rent to a family member or friend for less than fair market value, your property loses its rental status in the eyes of the IRS and becomes, instead, a second home. Then it is subject to the tax rules governing vacation homes, which limit deductible expenses to the amount of your income."
From the Chicago Tribune: "Internal Revenue Code section 280A covers family rentals. If a property owner charges a relative the fair market rent for a property, then the owner is entitled to all normal tax deductions for the property, including depreciation. However, if the owner charges below- market rent, then the owner can claim tax deductions only up to the amount of rent received."
Al and Missy. You guys Rock. Thank you.
If a relative is charged below market rent (second home taxation) but 2 others are non-relative renters, wouldn't it be 33% of the mortgage and taxes be deductible on Schedule A and 67% be on Schedule E? Kind of like me living in the house and renting out rooms to people.
Then when I sell I would have less depreciation to be taxed on.
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