Potential Tax implications for buying house for parents

[Zach Geddes]

First thank you for your time.

I live in CA and my parents are moving to MN where the rest of my family lives. Due to health issues my parents are now on disability and a fixed income and want to move for cheaper cost of living. We have chosen a house that a family friend owns and wants to sell off market.

They won’t qualify for a mortgage so my wife and I are going to buy a house for them ($90k house) and just have them pay us rent to cover the mortgage, ins and taxes.

Emotions aside and potential issues aside with that I’m just curious if anyone knows the potential tax implications are? Good, bad, indifferent... Thank you

[Will Dixon]

@Zach Geddes

Hi Zach,

First, glad to see some other Sonoma County residents on BP!

In regards to renting to a relative, the important tax issue is whether the transaction is “arms-length”. In order to treat the new home as a rental and be able to right off expenses against it (such as interest, taxes, insurance, etc.) you need to be charging a fair market rent. Do some research on the area and determine what a comparable house would rent for. (Save the data somewhere could refer back to if you were ever challenged.)

One benefit you can take advantage of is the “good tenant discount”. Basically charging a lower rent because you know the tenant will take extra good care of the property. A safe bet would be a 10% rent reduction.

If you were to charge your family a really low rent, say $100/mo, the IRS would classify the home as a primary residence and some or all of your expenses would be disallowed. So if your parents can afford close to market rate that would be ideal.