Basement apt question

[Michael Prasto]

I discussed with my sister house hacking and other investment ideas and we looked at duplexes and houses with apts..

My sister and her husband have decided to build a home and put an apt int the basement for our parents to live.  

The question of living with our parents has been discussed; my brother in law seems excited about it actually.  We discussed other options like apt, small house near by; they have decided that they want to have them connected. 

My question is how they should set this up? Should my parents just live there and gift them the maximum amount per year?

Should they set up a lease and make them official tenants? Financially it is not a stretch for my sis and broinlaw without having my parents contribute. 

How does this work is regards to depreciation? What about the improvements to the basement, including kitchen, separate entrance etc? 

The house would be new construction with finished basement. They would be adding the kitchen after closing.

Any input would be appreciated. 

Thanks