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Old 04-13-2014, 08:36 AM   #21
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Originally Posted by 38Chevy454 View Post
I have had a couple of rentals in the past. Sch E is the tax form as stated. Read up on that and you will understand what you can deduct. Yes you can deduct a trip to the house for example. Also any maintenance costs and repairs. I think the rule is you can use up to 2 weeks per year for personal use while still being considered a full time rental, but in your case this does not apply since you are visiting your daughter at her house. You just happen to be the landlord for that house.

I would just buy it with 20% down of your cash, then mortgage the balance. Your daughter can have a lease purchase agreement where she pays rent and a portion of that rent goes to savings for eventual purchase of the house. You get the benefits of the rental on your taxes, she gets a nice place to live at a rent she can afford. How much you want to put to her savings is up to you. Say rent is $1000 and mortgage is $700, taxes and insurance another $150. You can put the remaining $150 to her savings account for the house and you have no out-of-pocket costs (not getting into tax savings and technicalities of finance).

There is nothing that says when you sell that it has to be at current value. You can sell to daughter for less if you want. The amount you net after the sale is your choice. Being a rental you will have to pay long term capital gains on any increase. Also remember that depreciation on the rental property lowers your basis value, so even if you sell at same price you purchased, if you have any depreciation that amount will results in some capital gains.
Wouldn't this result in recapture of ordinary income, rather than a capital gain?


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Old 04-13-2014, 09:26 AM   #22
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Join Date: Apr 2013
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Originally Posted by haha View Post
Is she 1/2 owner of the house, or is it all yours, effectively a rental to her?

haha - she is effectively the co-owner of the house along with myself. Do not have a concern about that issue - she knows that our plan is to move into that home when she moves to something else and we can quitclaim the entire thing to my wife and I at that time. She pays for everything in the meantime other than capital type improvements. Basically, it is her house now and our future retirement home.

I made the downpayment and the remodeling costs when we purchased the home. It is less expensive for her to pay the mortgage and utilities along with regular upkeep, i.e. lawn maintenance, landscaping, etc. than renting.

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Old 04-13-2014, 03:14 PM   #23
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I have two kids in their mid 20s that both rent houses from me. In both cases, I paid cash for the house using money I was rebalancing out of bond funds over the last couple years. I didn't like stocks at the time and real estate in this area was still affordable. My only expenses are property tax and insurance. The kids pay all utilities, maintenance and upkeep. I get about 6-7% pre-tax return on invested capital, and the kids get a house for about the same rent as they were previously paying for a run-down apartment.

Both kids have good income, but don't have sufficient credit history and lack the after-tax savings for a downpayment. So this was a nice way to get them into a house sooner, while providing me with a reliable income-producing asset with a lot more upside potential than bonds. Win-win.

For tax purposes, we account for this as passive business activity on Schedule E, where we take depreciation expense along with property tax and insurance. The depreciation drives a lower tax rate on this income stream compared to bond interest as well. The rent is a little below market, but high enough that, combined with the maintenance arrangement, should not cause any problems with the IRS.

Depending on what happens in the future, either house would also be a nice "downsize" option for us. I must admit it's a little weird entering into a business arrangement with your kids, but the mutual benefits are significant, so we all got over the weirdness pretty quickly.

Retired at 52 in July 2013. On to better things...

AA: 45% stock, 35% bonds, 15% real estate, 5% cash
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