1st investment property w/parents as tenant. Tips, advice, ideas?

[Tracy T.]

Hello,  

I'm looking to discuss with others who have owned investment property where parents (or close family members) were their tenants.  Seeking others experience, advice around this   and lessons learned (e.g. lease, tax considerations, setup for future 1031 exchange).  I'm not concerned with issues of renting to family, etc. - more on ways that I should be looking at this as it is my first investment property.  

Here's the background:  My brother and I are purchasing a coop, fixing it up and then moving our parents in.  Parents have been renters all their life and we want to give them something better that finally is their own.  This will be a cash purchase with only my brother and I on title.  While this apt will provide a good positive cashflow if eventually rented to non-family in future, this was not the primary reason we decided to purchase (but of course needed to be in place).

We will not collect market rent, we just need to cover costs which will be half of their current rent expense.  While I've owned a home for the last 15 years, this will be my first investment property.  Would be very interested to hear from others that have followed a similar path and any advice they may be willing to share.  

Thanks for reading my post!

Tracy

[Dave Foster]

@Tracy T. If you want to set this property up for a future 1031 exchange you need to be careful that you treat it as investment property and not personal real estate.  I would recommend that you create a lease and charge market rent and in every way treat it as a stand alone investment property.  You can work within legal annual gifting limits to give a portion of that rent back to your parents each year.  But you have a crystal clear paper trail and tax record of using that property for full investment use.  Once established in this way you will be able to 1031 whenever the opportunity is right.

But, if this is a cash purchase and you are planning on your parents living there for life you may also think about putting the house in their name so as to be able to inherit it at a stepped up basis when they pass. This can be a real advantage for you in that it creates tax free money as opposed to tax deferred but there are some very real estate planning issues you'll want to explore with a tax and estate planning advisor.