If they are the one providing most of the cash, they might not want to carry that liability, but you've already negotiated with your partners on this and then the bank isn't cool with it, you could be in a pickle.

@Tyler Speelman Your strategy to assist your sibling with a down payment while minimizing tax liability is creative but comes with complexities.

Does anyone else do it like this and who do you use for liability insurance?

Just be sure to clarify that she isn’t a leaseholder but is authorized to reside in the unit.If you’re concerned about liability or want more peace of mind, you could ask the primary applicant for additional security, such as a higher deposit, depending on what’s allowed under Colorado law. 

It will depend on where you are doing your deals and what the liability is that follows you after a sale.

Depreciation recapture applies at ordinary income rates capped at 25%, increasing your tax liability.

Renting at FMV allows you to deduct mortgage interest, property taxes, repairs, HOA fees, and depreciation against your W-2 income, potentially reducing your overall tax liability.

It’s cash flowing about $50/month after everything (PITI, flood insurance, home warranty, excess liability & termite protection) - if I got ride of termite it would cash flow $125.

What happens if you lose on it, you now have an additional liability, not just a loss of money.Are you planning on keeping the current property or exchanging it (1031) into something else?

Focus on tax-saving strategies such as cost segregation studies and bonus depreciation to accelerate deductions.By qualifying as a Real Estate Professional (spending 750+ hours annually and materially participating), you can offset your wife’s S-Corp income with real estate losses, reducing your tax liability.