Somewhat unusual situation - one off, four to six month rental

[Mark C.]

I'll preface this by saying that yes, this is probably unusual, and yes I'm about to rent to friends. 

I'm in Texas, and I want to sell my house. I have friends that actually want to buy mine, but want to rent first so they can build up a slightly bigger down payment. 4-6 months, and then buy the house from me.

Personally, I'm ok with this, I know them well enough and I understand what they are trying to achieve, so I'm ok with renting it to them for a couple of months before they buy. And since I don't want to immediately jump into buying another property myself, this seems ideal. 

However, I'm absolutely bewildered and mind boggled by the sheer amount if information on the web, most of it seeming to conflict. No two articles are alike, and never is there a common theme of advice. 

Assuming the mortgage company allows me to do this, and my home insurance company does as well, here's the things I'm struggling on;

1. Leasing 

As I understand it, in order to make sure I'm covered legally, and for them to prove they are actually paying for somewhere to live during their own mortgage application, I need to provide them with a lease agreement. I'm not at all sure how to do this since we are privately agreeing on certain terms, so I'm not sure where to start. 

I'm also confused because I'm going to be charging them to live there, so how exactly do I invoice them in a way that isn't going to hurt their ability to apply for a mortgage in a few months? I'm not a registered business, just an individual. 

As far as invoices and payments, I've run across Cozy.co and paypals inbuilt invoicing feature, but I'm not sure if either will be sufficient for them and for them to proceed with a lending application. 

2. Taxes 

How the **** does this work as an individual that's planning to rent out for 4 months?! 

It goes beyond the 14 days tax free portion, but I can't work out if I will actually owe taxes on this. 

There seems to be no consistency whatsoever ablout what I can deduct or if I even still get the standard homeowners property tax deduction. 

Some sources online have said I can deduct the cost of the mortgage plus the interest payment. Some say only the mortgage interest. Some say one or the other. 

If my mortgage with escrow and insurance comes to $1800 a month, and (for the sake of argument here) I charge my tenant exactly that amount, some sources lead me to believe that even though I'm making no financial gains, that $1800 is taxable and I'll pay tax on it, and it's still not clear if I can deduct.  

I'm obviously in way over my head here, but trying to make an effort to learn this seems an impossible task with the myriad of bad information out there. 

Yes I realize a property management company could do certain things but we're talking something that don't last more than 6 months at the most. Surely there's a better way here ?!

[Jon Pitcher]

1.  Sign a lease agreement with your tenant.  Here's a form promulgated by the Texas Association of Realtors.  It's probably 5 pages longer than it needs to be, but it will work:

http://www.leaseaustin.net/assets/docs/lease_agree...

You don't need to invoice your tenant every month.  The lease spells out the payment terms, and it is the tenant's responsibility to pay you each month.  If they don't pay you, then find an eviction lawyer in your area and get some guidance on how to post the required notice and get them out of your house.  The lender is going to know that the tenant's lease payment obligation will end when they buy the house, so the rent isn't going to hurt their debt-to-income ratio or otherwise harm their ability to get a mortgage.

2.  The rent you collect will count as income.  Against that income, you can deduct mortgage interest, property taxes, insurance, repairs and depreciation for the period of time that the tenant lived there.  You can't deduct the principal portion of your mortgage payment.  Your best move here is to keep good records and take all of your documents to a CPA at tax time.