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I already have a house which is my primary residence. State of Arkansas. I want to buy a second house as an investment and let my brother, his wife and kids live there as long as they need rent free.

The second house will be in my name. Whenever my brother buys his own house (3-5 years), he will move out I’ll resell this second house, or rent it out to someone, I’ll see.

Questions:

  1. are there any tax repercussions for letting my brother live for free? Should I be charging a symbolic amount to avoid extra taxes?

  2. since this second house is not my primary residence, am I going to encounter higher taxes?

  3. can I claim the second house to be my primary residence too? Can I have two primary residences?

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    Does state of Arkansas mean that you live in Arkansas, that this hypothetical second house is in Arkansas, or both?
    – yoozer8
    Apr 20, 2023 at 3:35
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    You mention "3-5 years" as a timeline to end this arrangement based on your brother buying a house in this timeframe. If he does not, will you end the arrangement on that timeframe anyway (and try to evict him), or allow him to stay for 10, 20, or even 50 years?
    – yoozer8
    Apr 20, 2023 at 3:40
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    I second @yoozer8's comment. Funnily enough, most people find it surprisingly easy to get used to living rent-free, and you may have a hard time winkling them out after 5 (or 10 or 20) years. You need to find some way to set a hard limit on this time period, because otherwise you will be relying on goodwill, and that is the kind of thing that breaks up families.
    – TonyK
    Apr 21, 2023 at 20:47

3 Answers 3

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You should set up a rental agreement between yourself and your brother's family, even if the amount of rent is zero. If you and your brother have any disputes during the next 3-5 years (and, if you're unable to resolve them yourselves), you'll have a legal document to fall back on.

Perhaps consult a lawyer to figure out other issues we might not have thought of.

Paraphrased from vsz's excellent comment: Even if you completely trust your brother and every member of his family now and into the future, this document will make that trust evident to a court of law in case of any emergency or unexpected event where one of you has to represent and protect your interest in the home.

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    Depends on your relationship with your brother, I suppose. If you think you might need this, it's not a bad idea. If you really can't imagine a scenario where you'd actually enforce that contract, it may not be necessary.
    – keshlam
    Apr 20, 2023 at 9:03
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    >If you really can't imagine a scenario where you'd actually enforce that contract then you are naive and need this even more.
    – Bartors
    Apr 20, 2023 at 10:48
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    @Bartors OP needs to decide if they would sooner regard the house as a permanent gift or litigate. A lot of people would pick the former with someone they loved.
    – Clumsy cat
    Apr 20, 2023 at 11:01
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    Imagine though if the brother were to separate from his wife. This would immediately make the situation a lot more complicated - depending on the laws of the state the wife may continue to have some right of abode in the property and it would likely need to be litigated. A well-written rental agreement could help to clarify this situation. Apr 20, 2023 at 11:06
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    @bartors If you don't need the document, then both of you should also feel okay about having the contract spelled out explicitly in words. It's never redundant to be explicit about your intentions.
    – jpaugh
    Apr 20, 2023 at 14:44
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are there any tax repercussions for letting my brother live for free? Should I be charging a symbolic amount to avoid extra taxes?

In the US there's no "imputed" gift tax. So no, as long as you retain ownership and control you don't owe any taxes on the free rent.

since this second house is not my primary residence, am I going to encounter higher taxes?

Probably. You wouldn't be able to deduct any expenses for this house since it's not your second/vacation home and there's no rental income to deduct expenses from. That would increase your taxes if you'd otherwise itemize deductions. For property taxes - many times local authorities give discounts to homeowners living in their property, you will not get such a discount for that other house. Check with your local taxing authority.

can I claim the second house to be my primary residence too? Can I have two primary residences?

You can have two primary residences potentially in some edge cases, but not in this case. You cannot claim this as your primary (or secondary) residence since that would not be factually correct.

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    Could you maybe charge just enough rent to cover expenses, deduct those expenses from the rental income, and then gift your relatives cash roughly equivalent to that rent?
    – Earth
    Apr 19, 2023 at 22:38
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    @Earth to what end?
    – littleadv
    Apr 19, 2023 at 23:07
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    You could charge whatever rent you and your relative/tenant agree is reasonable. But you'd have to pay taxes on that rent as income, even if you wind up paying it to yourself. I don't see the advantage...
    – keshlam
    Apr 20, 2023 at 0:05
  • @keshlam: Does that let you treat the whole arrangement as a business loss to deduct maintenance expenses (or even depreciation of the property) from your taxes? Apr 20, 2023 at 17:34
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    @R..GitHubSTOPHELPINGICE rental expenses can only be deducted from rental income, and related parties transactions only allow expenses to be deductible to the extent there's income. I.e.: you cannot have a deductible loss if you're charging below market rents.
    – littleadv
    Apr 20, 2023 at 17:37
1

Who pays to mow the lawn (or shovel snow) ? If a light-bulb needs changing do you expect your brother to do it. You can afford to take a holiday and not always be available to fix a leaking faucet - first available plumber may be too expensive for your arrangement.

Another expense is building(s) insurance. If second house burns who pays for the fire brigade ?

If you can afford a second house and he can't its because you value the work of lawyers, builders and yourself. Make a contract, send the bills and write-off his bad-debts if necessary.

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    Either way he should let his insurer know that he house his rented out. My neighbour rented out his house to a family that did a lot of damage, but he hadn't told his insurer that he was renting it out for a while. That did not go well. Apr 21, 2023 at 11:54

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