Second residence - should I rent it or write it off as a second residence?



Hello out there,

I own three houses, of which one is my primary residence, one has a renter
in it with a legal rental agreement, and the third (newest one) was
purchased by me for my mother. All three of these houses are in my name. I
am going to have a couple of posts on this scenario because while the
background is the same the central question will be different.

My main question is, would it be better to have my mother sign a written
rental agreement and pay me an amount of money in rent approximately equal
to the monthly mortgage cost or to have her "gift" me $12,000 a year and
I'll pay the mortgage as if I had no renter and I can write the mortgage
interest on new property off as a second residence?




It would be much, much better all around to have a written rental agreement
with your mother. If you can justifiably low-ball the rent so that it
doesn't exceed the mortgage, that's best; otherwise, you should go with
the lowest rent you can justifiably claim and still qualify you to treat
the house as held for use in the trade or business of renting real estate,
or as held for the production of income. If you just let your mother live
there, or if she pays an unjustifiably low rent, then you run the risk
that your use of the house will be treated as personal use rather than
investment/business use. Having your mother make gifts to you that you
then use to pay the mortgage is probably not the best idea - you run the
risk of having the "gift" treated as rental income nonetheless, and (to
get really pessimistic) the possibility that your mother would be treated
as the owner of a portion of the house for tax purposes and you as holding
that portion of the house for her as her agent.

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