Purchase of Investment Property to Rent to Adult Child

[Roseann Stevens]

I am in the process of purchasing a single family house for my daughter and grandson to rent.  I am putting 20% down and financing the rest as an investment property.  Our intention is she will build her credit and save money for the down payment and closing costs to purchase the house from me in two years.  At that time I may consider utilizing an IRS 1031 exchange to purchase another property, repeating the process to help my son.  In both cases they are responsible, employed adults but have unique situations that prevent them from qualifying for mortgages.  My daughter is going through a divorce and has recently reentered the workforce.  My son is self employed.  Neither of them have debts and they both have very good credit scores.  I’m not expecting to profit from this scenario and I want everything to be done 100% according to tax law.  I’m educating myself on IRS 1031 and will certainly be consulting a real estate attorney.  Has anyone had experience with this kind of venture?

[Dave Foster]

@Roseann Stevens, You do want to be careful when dealing with related parties.  It is fine for you to sell that property to your daughter and 1031 when you are ready.  In order to get a safe harbor as such for that. you will need to complete your 1031 and hold the new property for two years.  And your daughter will need to hold the property she gets from you for two years.  But other than that the 1031 would be fine for you.

As long as you are treating that property like an investment.  Which means actually rent it to your daughter.  Have a lease, collect and report rent.  File taxes on it as an investment.  This will have a number of positive impacts.

1. You will strengthen your case that the property is truly an investment property qualifying it for a 1031 exchange.

2. You will be able to get the other benefits that come with investment real estate - primarily mortgage interest deduction, expenses write off, and depreciation allowance.

3. You are helping her build her financial position by enabling her to show steady rental status and responsible paying of a  recurring bill.  

4. And maybe most important of all you are allowing her to work for something and reap the benefits of her work. rather than giving something and creating entitlement.  The boost in self esteem from earning something on her own merits can't be overstated when she's already going through a tough time.  Kudos to you for being there and wanting to do ti the right way.